Finance

[WebBoard]

From: Mike .


Is this legal
From: Vesta
Date: 20 Jan 2001
Time: 09:55:52

is it ok to put the rent received from your investment property into your own line of credit account, making use of that money until such a stage as the interest for the rental property is due?

 

[WebBoard]

Sim

Reply: 1
From: Mike .


Re: Is this legal
From: Sim'
Date: 20 Jan 2001
Time: 19:33:04

Yes, this is perfectly legal.

1. You have earned rental income, and you will pay tax on that income (less expenses), regardless of where the money is put.

2. You can claim the interest on the loan for the IP as an expense, provided it is for IP purposes only.

3. You cannot claim the interest on your personal LOC (non-investment), regardless of whether money from your IP is deposited in there or not.

4. If you were to deposit the rent money into an interest bearing account, you would then pay tax on the interest earned. By putting it into your LOC account you are saving interest... tax free savings !!

5. If you were going to be particularly careful with your accounts, you would have a separate account used solely for the IP funds... rent money gets deposited into it and all expenses including interest get withdrawn from it. This way you have a clear trail of where the money comes from and where it goes. This is not strictly necessary, but can make your life much less stressful in case of an audit. If you have many IPs I would strongly recommend a separate account !

Sim'

 

[WebBoard]

Mike

Reply: 1.1
From: Mike .


Re: Is this legal
From: Mike
Date: 20 Jan 2001
Time: 17:14:10

Hi Vesta,

You have to park the money somewhere if there is a lag time between rent received and interest due. In my case, the rent is deposited into my home mortgage offset account on the first day of the month. The interest is debited from one to six days thereafter. I don't know why the interest debit day varies. Maybe some enlightened person in the Forum could shed some light on that.

Regards, Mike

 

[WebBoard]

Ric G

Reply: 1.1.1
From: Mike .


What about this?
From: Ric G
Date: 21 Jan 2001
Time: 10:55:09

Vesta,

Your post got me to thinking - if you paid the rent straight into your personal LOC and capitalise the interest on your investment LOC, would the additional interest payable be tax deductible?

 

[WebBoard]

Sim

Reply: 1.1.1.1
From: Mike .


Re: What about this?
From: Sim'
Date: 21 Jan 2001
Time: 16:59:04

The ATO takes a very dim view of capitalising the interest on investment loans.

For this reason, some LOC/offset loans are not suitable for investment purposes.

Take a look at some of the information on the ATO web site in regards to investment if you want more information.

Sim'

 

[WebBoard]

Rolf

Reply: 1.1.1.1.1
From: Mike .


Re: What about this?
From: Rolf
Date: 21 Jan 2001
Time: 20:30:32

Hi

The ATO do not mind you capitalising the interest. That is your business. BUT do not try and claim the cap interest as tax deduction. Yes Sim you are right - they would not allow this as a deduction - a relatively recent change.

However, If you still have a personal (home) mortgage, there is nothing stopping you from parking ALL your income against your personal debt and BORROW all your expenditure for your IP's such as rates, maintenance, strata etc. (except interest of course). This results in you being able to pay off your own home a little earlier (1 to 3 years on a full term loan)

Ta - Rolf

 

[WebBoard]

Red

Reply: 1.1.1.1.1.1
From: Mike .


Re: What about this?
From: Red
Date: 22 Jan 2001
Time: 10:20:26

Hi Rolf,

You say that you can BORROW all your expenditure for your IP's such as rates, maintenance, strata etc. (except interest of course).

Why do you say that you can't borrow the interest payments form you home loan as well?

Regards, Ross

 

[WebBoard]

Rolf

Reply: 1.1.1.1.1.1.1
From: Mike .


Re: What about this?
From: Rolf
Date: 22 Jan 2001
Time: 19:00:05

Hi Ross

Until a couple of years ago it was both fashionable and legal to market Mortgage Minimisation Startegies that involved Purchasing an IP and not paying the interest on the IP but capitalising it - borrowing the interest, and using the +v cash flows from the IP to pay out your home loan much much faster. It is still legal to borrow the interest liability on your IP but you can not deduct the capitalised interest from your income tax - ie a wasted excercise. Please do not ask me why - it was possibly costing too much in deductions !(oh really !)

Ta - Rolf

 

[WebBoard]

Bob

Reply: 1.1.1.1.1.1.1.1
From: Mike .


Re: What about this?
From: Bob
Date: 22 Jan 2001
Time: 12:27:16

Red,

You can BORROW the money for the interest, but you can't tax deduct it - it's called capitalising the interest. ATO specifically banned the deduction when many RE investors quite reasonably borrowed for the interest on their IP while devoting all their income to paying off their non-deductible mortgage. Effectively they were making their home loan tax-deductible. The ATO ruling was in 1997, if I recall correctly. Shame, that.

 

[WebBoard]

Red

Reply: 1.1.1.1.1.1.1.1.1
From: Mike .


Re: What about this? Hey Bob
From: Red
Date: 22 Jan 2001
Time: 16:08:47

Hi Bob,

I will have to disagree with you. The rulings that you are talking about are TR97/d7 & NAT97/18.

Both of these talk about interest on interest.(capitalising the interest).

If you take money from one loan to pay another there is no interest on interest, as long as you are paying the min off both loans you should be safe!

You can BORROW the money for the interest, and you can tax deduct it -

What do you think...

Regards, Ross....

 

[WebBoard]

Sim

Reply: 1.1.1.1.1.1.1.1.1.1
From: Mike .


Re: What about this? Hey Bob
From: Sim'
Date: 22 Jan 2001
Time: 16:30:23

If you do the sums (I don't feel like it right now), I think you'll find that you are going to go backwards big time if you start borrowing money to pay the interest on your existing borrowings.

At the end of the day, the winner is the person who made the most money, not the person who got the biggest tax refund.

A loss is still a loss is still a loss ;-)

Sim'

 

[WebBoard]

Bob

Reply: 1.1.1.1.1.1.1.1.1.1.1
From: Mike .


Re: What about this? Hey Bob
From: Bob
Date: 24 Jan 2001
Time: 04:13:12

Those are the rulings alright. Let's look at what I think you're proposing. You have two loans. Loan 2 has been drawn down at least in part to pay the interest on loan 1. The amount you borrow on loan 2 is not deductible - loans aren't deductible, only the interest is. However, under the rulings, where loan 2 repays loan 1 interest, neither the amount NOR the interest are deductible, as the interest is "interest on interest" and the loan itself isn't deductible.

 

[WebBoard]

Skorpio

Reply: 1.1.1.1.1.1.1.1.1.1.1.1
From: Mike .


Re: What about this? Hey Bob
From: skorpio
Date: 24 Jan 2001
Time: 07:53:56

If I were to build a rental property and take out 10K from my line of credit and use this money to pay the interest on the progress payments, then what you are saying is that the interest payments are not tax deductible.

Or is it that the interest payments are tax deductible but the interest on the $10k is not.

The loans would be with 2 different banks.

 

[WebBoard]

Sim

Reply: 1.1.1.1.1.1.1.1.1.1.1.1.1
From: Mike .


Re: What about this? Hey Bob
From: Sim'
Date: 24 Jan 2001
Time: 10:55:18

Lets say loan A is for the IP, loan B is your personal LOC.

Interest on loan A is tax deductible.

Using funds from loan B to pay the interest on loan A does NOT make the interest on loan B tax deductible.

Hope that makes sense.

Sim'

 

[WebBoard]

Skorpio

Reply: 1.1.1.1.1.1.1.1.1.1.1.1.1.1
From: Mike .


Re: What about this? Hey Bob
From: skorpio
Date: 24 Jan 2001
Time: 22:19:18

Amazing! You learn something new every day. So the Ip interest is tax deductible but the L.O.C. is not.

My LOC is now $10k heavier, but I cannot claim the $700 interest on the $10K. In other words I just treat it as a non deductible expense.

Is that correct?

Thanks for your help.

 

[WebBoard]

Red

Reply: 1.1.1.1.1.1.1.1.1.1.1.1.1.1.1
From: Mike .


Re: What about this? Hey Bob
From: Red
Date: 25 Jan 2001
Time: 08:05:47

Hi Skorpio,

Below is part of a letter that I sent to various Accountants with a scenario set out to try and clear up the issue. The response was mixed but most agreeing in principal.

The loans are as follows.

Loan 1) Home loan.
Loan 2) Personal investment loan.
Loan 3) Investment home loan.
Loan 4) 2nd Investment home loan.


1)What I propose to do is to place all income from our employers and investments into loan 1.

2)The interest and principal payments for loans 2, 3 and 4 will be paid for from loan 1 by redrawing funds from loan 1.

3)Loans 2, 3 and 4 will have their principal and interest payments made in full each month.

4)Any fees and charges for the loans 2, 3 and 4 will be paid from redrawn funds from loan 1.

5)Any bills required for the upkeep of the investments from loans 2, 3 and 4 will be paid from redrawn funds from loan 1, i.e. body corporate, rates, sinking fund, new furnishings etc.

6)The total of loan 1 will become separated into income and private amounts. This separation will be calculated on a prorate basis, based on the usage of the redrawn funds. Each part of this loan will have it’s own interest and principal payment calculated as per the tax ruling TR2000/2. Both the principal and interest amounts that are calculated for each part of this loan would be paid each month in full via the income stream into loan 1.

I wish to claim on our taxable income all the interest on the “new borrowings” from loan 1 that are put towards payments and the upkeep on each investment and their respective loan.

In your opinion is the above scenario going to be allowed by the Australian Tax Office i.e. meet the criteria set out in TR95/25, TR97/d7, NAT97/18, TR98/22, TR2000/2 and section 8-1. Please advise me of your findings in writing.

Regards.

The best thing to do is to go to the tax site yourself and down load the rulings.

Regards, Ross.

 

[WebBoard]

Sim

Reply: 1.1.1.1.1.1.1.1.1.1.1.1.1.1.1.1
From: Mike .


Re: What about this? Hey Bob
From: Sim'
Date: 25 Jan 2001
Time: 09:53:49

Well, it seems as though you are going to a lot of trouble to play by the rules (ie. calculating the pricipal and interest components the 'correct' way), so I guess you should do okay (I'm not an expert on such matters !)

I am worried about other people who just take the easy way out and say "he can do it, therefore I will too"... and then not follow the rules.

It is these people who will run into trouble with the ATO, because they thought they were doing the same as you, but in reality didn't actually understand the rules.

Sim'

 

[WebBoard]

Michael Croft

Reply: 1.1.1.1.1.1.1.1.1.1.1.1.1.1.1.1.1
From: Mike .


Re: What about this? Hey Bob
From: Michael Croft
Date: 25 Jan 2001
Time: 08:11:55

Haven't been audited, Yet, but have been doing it for years. Michael

 

[WebBoard]

Red

Reply: 1.1.1.1.1.1.1.1.1.1.1.1.1.1.1.1.1.1
From: Mike .


Re: What about this? Michael
From: Red
Date: 25 Jan 2001
Time: 09:47:38

Hi Michael,

I would love to know how you control the in's and out's. I have done up a spread sheet, would love to swap ideas...please e-mail me..

[email protected]

thanks, Ross..