Deductibility of Loan to construct 2 investment properties

[Rolf Latham]

k

im still not quite with the fact that the lender wont allow her to be a co borrower without being on title.............im sure we do it a bunch

ta
rolf

 

[Propertunity]

What is a PBR?

A Private Binding Ruling (from the ATO, in relation to your tax affairs)
http://www.ato.gov.au/taxprofessionals/keywordlist.aspx?k=Private binding ruling (PBR)

 

[vladg]

A Private Binding Ruling (from the ATO, in relation to your tax affairs)
http://www.ato.gov.au/taxprofessionals/keywordlist.aspx?k=Private binding ruling (PBR)

Thanks for the link.

Rgds

 

[nathank]

I have done exactly this and have just gone through to the ATO for a private ruling (on a substantial, $50k+ repair bill to a bridge), so any issues i'm sure will get picked up in regards to the loan as they have the fine tooth comb out.

Background:
Bought a large block of land in Sydney in 2006, took ~3 years to get through council (*shakes fist* at hornsby council!) and a year to build.

My name is on the title of the property, the loans (land + construction) are in my name with my wife as a guarantor.

2 accountants and the broker (who suggested i have a solicitor draw up an "on-loan agreement" stating that my wife is gifting the funds to me for my own investment) have advised that what i am doing is fine and that i can claim 100% of the deductions.

 

[vladg]

k

im still not quite with the fact that the lender wont allow her to be a co borrower without being on title.............im sure we do it a bunch

ta
rolf

They will allow her to do this but they say that they may need her to add some of her own equity as security to support the loan (still clearing this up).

So for the construction loan, they will have as security - (a) the property which will be constructed on and (b) her investment property (which they already have a mortgage over anyway).

May be I should just start from scratch and get my whole portfolio refinanced and restructured (when my current loans move from prepaid in a few months) taking into account the new construction loan...

 

[nathank]

Yes until May/June this year. All my debt is structured for investment purposes, so I have prepaid interest for 12 months on all the loans I have with them (5), they are all out of the fixed interest period this May and June. I will then have the flexibility to refinance.

By the way, i was with CBA when i financed with them. So not sure why they are busting your chops?

my wife was never on the title, and they financed my wife in as a guarantor with no issue... suggest you give a better broker a call to get it sorted?

 

[Aaron_C]

vladg don't yield to giving banks additional collateral if you don't have to. You may have to pay slightly higher rates but so what?

 

[vladg]

By the way, i was with CBA when i financed with them. So not sure why they are busting your chops?

my wife was never on the title, and they financed my wife in as a guarantor with no issue... suggest you give a better broker a call to get it sorted?

Was your wife guaranteeing the equity or the servicing?

The issue is not about equity for me rather it is about servicing. Even with the additional fully drawn down construction loan, my LVR will be around 60%.

Based on the CBA calculations I need more income, therefore, I supposedly need my wife as a loan party to support the servicing on the construction loan. The way I understand the situation, the bank at this stage is saying that it is their policy that she also needs to have an interest in the underlying asset or possibly she needs to have some of her own security to support her part of the loan. They are checking this for me and expect an answer soon.

Time will tell....

 

[nathank]

Was your wife guaranteeing the equity or the servicing?

it was for servicing the cash flow and my LVR was 80%.

are you going direct to CBA? or through a broker?

 

[Terryw]

The ATO has a very different view on this.

This is news to me. Do you have any references to back this up?

 

[Rolf Latham]

The way I understand the situation, the bank at this stage is saying that it is their policy that she also needs to have an interest in the underlying asset or possibly she needs to have some of her own security to support her part of the loan. They are checking this for me and expect an answer soon.

Time will tell....

Thats not my experience, BUT what i my experience is that lenders will often try for more "contribution" just for managing their risk..........

Stand your ground here, I suspect u will be ok.


This week, that same lender just finalised an approval for us for a 70 % GRV multi unit build.

Requested the usual first mortgages, guarantees from directors of the trust, guarantee from the clients steam engine operating company.............and then a little slide in of a fixed and floating charge on the operating company ( ie the clients business worth some 2 x the loan amount)

Took about 30 minutes to have that fixed and float removed...............

I never cease to be amazed what lenders will try and get away with, more so, I wonder how often borrowers out up with stuff they dont have to.

ta
rolf

 

[Aaron_C]

This is news to me. Do you have any references to back this up?

Yes, a live case right now where the owner of the property is not the same as the borrower in the bank documentation due to a bank mistake. ATO disallows all interest deductions relating to the property by the owner of the property.

 

[Terryw]

Yes, a live case right now where the owner of the property is not the same as the borrower in the bank documentation due to a bank mistake. ATO disallows all interest deductions relating to the property by the owner of the property.

Can you please elaborate a bit without giving away names etc, who was the borrower and who was on title, any trusts involved etc. Thanks

 

[Aaron_C]

Can you please elaborate a bit without giving away names etc, who was the borrower and who was on title, any trusts involved etc. Thanks

Person A is the owner of the investment property. His personal company, Company B, is mistakenly placed on the loan documentation as the borrower with Person A merely as a guarantor. This was not the intention of Person A, it was just a mistake on the bank's part. The mistake arose because Company B was concurrently getting a different facility with the same lender (but with a different security).

 

[Terryw]

Person A is the owner of the investment property. His personal company, Company B, is mistakenly placed on the loan documentation as the borrower with Person A merely as a guarantor. This was not the intention of Person A, it was just a mistake on the bank's part. The mistake arose because Company B was concurrently getting a different facility with the same lender (but with a different security).

What a mistake! That is just like the company borrowing using the property of the person as security. Was the money used to buy the property?

It could possibly be argued that the company onlent the money to the person A, but may be a bit late if it has all happened - although loan agreements do not need to be in writing.

The ATO presumes there is a loan between spouses when one is on title but two on the loan. This is different because A is unlikely to be married to his company and there is a commercial aspect.

What did the barrister say? Any chance to sue the bank?

 

[Aaron_C]

It wasn't a purchase, it was actually a refinance, which makes the ATO's stance all the more ridiculous!

Possible to sue the bank but not sure whether it would be frivolous given the amount at stake is about $150,000 in deductions...

 

[vladg]

it was for servicing the cash flow and my LVR was 80%.

are you going direct to CBA? or through a broker?

I am going direct to CBA - have been a direct customer for close to 15 years and have always been looked after. My affairs though are getting more complex so may need a different approach.

I should be getting a response from CBA today, so will see what they say.

 

[vladg]

Person A is the owner of the investment property. His personal company, Company B, is mistakenly placed on the loan documentation as the borrower with Person A merely as a guarantor. This was not the intention of Person A, it was just a mistake on the bank's part. The mistake arose because Company B was concurrently getting a different facility with the same lender (but with a different security).

My situation is different to this. In my case I would be clearly a party to the loan contract. In the case above, the party taking the loan (Company B) is an entirely different entity, so can see why the tax office is questioning the deductibility.

So at least on these facts alone, I don't think the scenario (as put forward by Aaron_C) above would necessarily apply to my situation.