How do I get the equity out of my investment properties to reduce non deductable debt

[Terryw]

See also the compendium to TD 2008/27
http://law.ato.gov.au/atolaw/view.htm?locid='CTD/TD2008EC27/NAT/ATO'&PiT=99991231235958

The issue of applying PartIVA comes up.

issue raised: Suggests that it would be useful to have a discussion on the potential application of Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) to compound interest.

Tax Office Response/Action taken: Paragraph 15 of the Determination states that it does not deal with the application of Part IVA. This was not the focus of the Determination Guidance on the application of Part IVA can be found in Taxation Ruling TR 98/22.

 

[Terryw]

TR 98/22 Income tax: the taxation consequences for taxpayers entering into certain linked or split loan facilities
http://law.ato.gov.au/atolaw/view.htm?docid=TXR/TR9822/nat/ato/00001

This ruling applies to persons who enter into certain linked or split loan facilities as described in paragraphs 3 to 6 of this Ruling. This Ruling considers whether Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) applies to disallow interest that would otherwise be deductible on these linked and split loan facilities. The ruling does not consider the deductibility of interest incurred under these facilities and whether the interest disallowed pursuant to Part IVA forms part of the cost base of assets financed by these facilities. See Taxation Determination TD 2005/33 for the Commissioner's view on whether the interest disallowed pursuant to Part IVA forms part of the cost base of assets financed by these facilities.

For the purposes of this Ruling, a linked loan is a credit facility taken out with a financial institution under which there are two or more loans with an account being maintained in respect of each loan. A split loan is a credit facility taken out with a financial institution under which there is one loan with sub-accounts being maintained in respect of that loan.

Application of Part IVA

15. The general anti-avoidance provisions of Part IVA apply to disallow any additional interest incurred on the investment account that is deductible under s 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997): FC of T. v Hart [2004] HCA 26.

Morg, your problem maybe the type of loan, the portfolio being a split or linked type. Splitting them over a few banks may be safer.

 

[morg]

Thanks for that Terry.
I'll have a read through those links and see what I can find out.

 

[wobbycarly]

FWIW, in my memory of the Julia Hartman article, it was also mentioned something of the lines of "if you would enter into the arrangement regardless of the tax position (my emphasis) then you are not seen to be attempting to enter the arrangement purely for the tax benefit".

So focusing on the tax position may, by definition, put one in a position where Part IVA considerations apply.

 

[Rixter]

I have been given under very good authority that if you want to apply to the ATO for a Personal Ruling in order to Debt Recycle, under purpose of the loan one's needs to state, and I quote - "To separate business & personal expenditure" - end of quote.

I hope this helps.

Have a happy day!

 

[Mry]

It just shows how difficult this area is for tax professionals. Even if something is legal, Part IVA can knock it down if it is entered into to seek a tax benefit. That's why your intentions in the end make the difference on whether you can claim it or not.

 

[Terryw]

I guess the ATO could even apply Part IVA to people buying negative geared property with the dominant purpose of obtaining a tax benefit!

 

[Ian (WA)]

I guess the ATO could even apply Part IVA to people buying negative geared property with the dominant purpose of obtaining a tax benefit!

Interesting read so far, but I think Terry has hit the nail on the head with his comment above.

I think we often drill down to far into something which is quite simple, then end up tying ourselves in knots over all the "waht ifs?".

Accountants are very risk averse and unless it is in black & white and really big, bold font.........they will comment in such a way as to then cause you to have doubt.

I've read Julias articles on Capitalising Interest as well as her multitude of posts on Hybrid Trusts which put the fear of God up people. I wouldn't take her comments as gospel. She is very averse by way of her profession. I have a hybrid trust which is very commercial and very, very positive generating significant cash income from day one. I don't have 35 mysterious family beneficiaries listed as having any beneficial interest either (unlike some).

My accountant is very happy with our HDT and has no concerns whatsoever. I have shown her all Julias writings as well as many of the postings on this forum & others and she concurs that yes there were / are some questionable applications of HDTs, but to poo poo HDTs in general is misleading and wrong.

In applying for LOC top ups etc. to enter into an interest capitalisation structure, just make sure you make it very clear from the outset that.....you wish to pay down your PPOR as soon as possible (I wouldn't use wording like deductible or non-deductible interest anywhere.....keep your commentary clean and to the point......and simple!!).

No I am not an accountant, but if I followed all the nervous nelly commentary read in all the magazines and on some of the forums I frequent I would never damn well do anything, or invest in anything. I think sometimes the good intent often generates unnecessary fear.

Before anyone jumps down my throat about ATO audits & Private Rulings.......if I get done, i'll be sure to post the results for your dissemination and future reference.

Set your own boundaries and comfort levels.

Cheers,

Ian.

 

[alexlee]

IP negative gearing would be on the 'do not touch, leave it to the pollies' list, surely. Interpretation and how much the ATO cracks down is political.

My understanding is that deductibility is based on purpose / use of proceeds, which is independent of the income generated.

For example, say I had no income because I'm unemployed, so I have to capitalise interest because I have no other means to do so. There wouldn't be any issue with full deductibility of interest on the capitalised portion . Alternatively, if I have no PPOR mortgage, and I capitalise interest and spend the rent on personal expenses, would there be any issue? As another example, if I have a PPOR loan, and I capitalise IP interest but then use the rent for private spending (instead of putting it against the PPOR loan), does that change my 'purpose'?

While deductibility depends on the use to which you put the proceeds of a loan, I'm not aware of any rule that requires you to use the INCOME from an investment in a certain way. e.g. as far as I know the ATO doesn't have a rule that says 'you have to use all your dividends to pay margin loan interest before you capitalise'. What if I use DRPs, for example?

On that basis and the private rulings that have come out, it would seem that the ATO can only disallow capitalisation under specific circumstances (the split loan thing, for example).