Are the banks less likely "now-a-days" to open a LOC to allow an investor just to capitalise their IP costs? That would put the kibosh on this sort of strategy.
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I have 3 properties, 2 investments and 1 PPR. Unfortunately my PPR has the highest non deductible debt. Both my investment properties are positively geared, with a combined equity of $140K. My accountant suggested I should use the equity from the IP to buy shares and increase non deductible debt. Hopefully as the shares increase in value, I sell them and place the profits my PPR (non deductible debt) Does anyone have any thoughts on this? What are other ways I can reduce my non deductible debt. I don’t really want to sell the properties. Thanks in advance,
Dear Krak
bene313 has got the strategy in one.
The planned actions you could take include:
Hope this is of some help
- have your IP revalued and borrow the maximum possible that they will lend you (avoid cross collatorisation) - assume redraw loan of $140k
- have your PPOR revalued and borrow what you can out of this as well as a separate redraw loan - assume redraw loan of $60k
- ensure you have an offset account against your PPOR and do not put funds directly into your PPOR loan
- use the $140k (and if applicable the $60k) to pay all your investment loan interest and all your investment costs. This makes all the interest deductible on these new loans.
- To diversify you could consider buying shares and/or you could use some of these borrowed funds to purchase another investment property using some part of the $140k and/or the $60k. Just ensure that you quantify and set aside say 3 years worth of investment costs (interest + ongoing costs) so that you can capitalise at least 3 years worth of investment expenses - by that time you may have enough equity to redraw again
- Ensure that the "bank purpose" for the loan is to invest in further investment properties and quantify the extra rent you expect to get from these investment to help with your DSR (Debt to Service Ratio with the bank)
- then put your own salary, cash, rents from your IP's into your PPOR offset account
- you dont need to sell your property to anyone, hide any assets/growth - forget all that
- you also do not need a private ruling for the above - just keep everything nice and separate - new borrowed funds only for investment and all cash into PPOR to reduce consumer debt
- you will find before you know it you will have paid off all your PPOR and then be ready to invest again using growth in all the properties.
Best Wishes
Corsa
Corsa, Julia Hartman wrote in support of the above theory (the crediting rent against non-deductible borrowings and capitalising interest part) in an edition of API late last year after she obtained a Private Ruling for a client. In her article she recommended others wanting to go along the same path also obtain a Private Ruling. Could you tell me why, however, you are so sure that in doing what you say above a Private Ruling is not necessary? Thanks.
Income tax: is the deductibility of compound interest determined according to the same principles as the deductibility of other interest?
Ruling
1. Yes. The principles governing the deductibility of compound interest are the same as those governing the deductibility of ordinary interest: Hart v. Federal Commissioner of Taxation [2002] FCAFC 222, 2002 ATC 4608, (2002) 50 ATR 369 ( Hart ). The Commissioner accepts that this is the law following the Full Federal Court's decision in Hart .
Just wondering how you get around PARTIV ?
I had a look at doing this awhile ago, but was advised against it.
Reason being was that the dominant purpose was to receive a tax benefit.
I certainly don't need an ATO auditor in my face, so chose against this course of action.
Just wondering how you get around Part IVA when capitalising interest ?
I had a look at doing this awhile ago, but was advised against it.
Reason being was that the dominant purpose was to receive a tax benefit.
I certainly don't need an ATO auditor in my face, so chose against this course of action.
The successful Private Ruling that was obtained by Julia Hartman and detailed in November 2009 API was achieved by arguing that the dominant purpose was not to receive a tax benefit, but to pay off the mortgage on the applicant's PPOR faster. To want to pay off your PPOR mortgage as soon as possible is a natural wish and that was the dominant reason for directing the IP rent to the PPOR mortgage. It just so happened that this method resulted in a tax benefit becoming available that could be taken advantage of . I highly recommend reading the article.
Corsa, horses for courses as you say, but it's confusing that Julia Hartman is not as confident as you are with regards this theory and still recommends the private ruling path. To do so indicates that she sees it still as a grey area. The Private Ruling mentioned above taking over 6 months to be granted would further possibly indicate that the ATO is "unsure" of the method and tried their best to find a reason not to grant it...
The successful Private Ruling that was obtained by Julia Hartman and detailed in November 2009 API was achieved by arguing that the dominant purpose was not to receive a tax benefit, but to pay off the mortgage on the applicant's PPOR faster.
I'm curious why the confusion by the ATO in this regard when they quiet happily accept capitalising interest on Margin Loans for Shares?
Essentially any expense you incur to produce income is deductible. Any expense that is private in nature (ie in relation to a PPOR) is not deductible. Keeping those lines really clear clarifies most tax issues. Hart's blurred the two (PPOR & IP with the split loan) so that was the problem there.
...the above quote illustrates my confusion: keeping the lines of deductible and non-deductible transactions clear is important. So, logically, rent (taxable income) therefore should go against from where it's associated - IP loan (deductible). But you're advocating it go against PPOR mortgage (non-deductible). Isn't this a contradiction?
Hiya Rixter
Horses for courses, it is definately not good practice to put your rents into a PPOR, an offset for sure for ultimate flexibility.
Best Wishes
Corsa
The Tax Office has clarified via the PR that you do not neccessarily have to apply income (rental or shares) against the related security loan. If we agree on this point then this automatically provides some assurance to use any investment income to pay down PPOR debt and/or live off.
So on that basis, if you have a redraw on an IP for eg - I think it is better to keep these funds separate and use all those funds for investment purposes and then all interest is clearly deductible.
Are you currently living off your portfolio or planning on how you are going to retire from your portfolio?