Interest Deductibility

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From: George Peters


G'Day All,

I've just purchased my first IP. The title will be in my name only. The loan however is under 2 names (mine & my wife's). Will I be able to claim as a tax deduction all the interest in my tax return or will the ATO require my wife to claim her share of the interest?

Would it be better to have the loan under my name only?

Any help would be appreciated.

Thanks
 
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Reply: 1
From: Mike .


Hi George,

Only the taxpayer(s) who has/have a legal interest as stated on the title deed can claim loan interest as a tax deduction. The fact that the mortgage is in two names is irrelevant to the ATO.

Since you are using the borrowed money (loan) solely for income-producing purposes (rental), you can claim the loan interest as a tax deduction.

Maybe others can answer your other question: "Would it be better to have the loan under my name only?" Or ask your lender directly what the pros and cons are.

Regards, Mike
 
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Reply: 1.1
From: Juzz O'K


Sorry to put a negative on this one.
How about in a business name Pty Ltd?
Not saying that it could happen but,
Worst case scenario in a divorce settlement a business name will give only 30% of it to the spouse.(Pls Check Figures yourself)
& Make sure you have an exit strategy, a business can give you time to exit as well.
That brings up another topic on its own.

Juzz
 
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Reply: 1.1.1
From: Rixter ®


George,

Why have you got both yours & wife's names on the loan?...

The only reason I could foresee this having to be done was if your lenders lending criteria was suggesting that your servicing ability was an issue with your name only and they required your wife's income to push you across the line..

If this was the case most lenders would require both names on the title, either as joint tenants or tenants in common...which one you pick is entirely up to you however being as tenants in common would be more of a financial advantage as it allows you to split your ownership proportion in favour of the highest income earner and therefore allowing a higher deduction for the property outgoing costs.

Happy Investing,
Rixter :)
 
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Reply: 1.1.1.1
From: H T


I have an electronic version of the tax ruling from 92 'if anyone's interested

peelsman@excite.com
cheers
 
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Reply: 1.2
From: George Peters


Hi Mike,

Thanks for your reply.

On 7/25/01 12:39:00 AM, Mike . wrote:
>
>Since you are using the
>borrowed money (loan) solely
>for income-producing purposes
>(rental), you can claim the
>loan interest as a tax
>deduction.
>

When you say you can claim the loan interest as a tax deduction, is that 100% of the interest on the loan account or just my 50%.

I called ATO, spoke to 2 different people and got 2 different answers. One said only 50% of the interest can be claimed and the other said that you can only claim the portion that isn't secured by your residence.
ie if you use equity in your home for a 10% deposit on the IP then you can claim 90% of the interest.


Cheers

George
 
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Sim

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Reply: 1.2.1
From: Sim' Hampel


Hmm... you really need to talk to an accountant who understands you situation and get them to explain it to you.

The reason you may get differing answers from two different ATO people is that they may not fully understand the question or the context of the question you are asking them.

Remember that it is the purpose of the loan that determines tax deductibility.

In your case, the purpose of the loan was to purchase a house that is in your name (your name is on title). Banks will generally want as much security as possible or as many guarantors as possible to ensure that they have a good chance of recovering their money if you default.

Hence if you default on the loan, even though it is your property by title, because you wife has effectively gone guarantor by having her name on the loan documents, the bank can pursue her for the outstanding debts after you've done a Skase.

What the bank does has nothing to do with what the ATO requires.

The property is yours, the liability is yours (other people provide a repayment guarantee, but that is incidental), therefore you should be declaring 100% of income and claiming 100% of expenses (including loan interest expenses) on that property.

Note that I am not qualified to give advice in any of these matters. Please speak to a suitably qualified professional to verify the correctness of anything I have written here !

 
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Reply: 1.2.2
From: Mike .


Hi George,

I'm in agreement with Sim's comments. Today, I made my own enquiries to the ATO. This is what happened:

Dialing 132861, as quoted in the Tax Pack, I reached General Enquiries. I explained the entire situation to the adviser, including the bit about 10% deposit secured by equity in your home. She searched her database for Rulings or legislation but couldn't find anything so transferred me to a CGT adviser. I repeated my story and, like the first person, she didn't think the equity thing nor the 2 names on the loan thing were relevant. So she transferred me to a Personal adviser and I repeated my story to him. Like the previous advisers he hadn't heard anything like the 2 stories you got from the ATO. In the end, he suggested that I apply for a Private Ruling.

Also, today I picked up the Rental Properties guide 2000-01. The wording regarding multiple interests in property hasn't changed from last year. It says:

"Joint tenants or tenants in common must divide the income and expenses in accordance with their legal interest in the property. If you don't know whether you hold your legal interest as a joint tenant or a tenant in common, read the title deed for the rental property."

Check out this link to the ATO:
http://www.ato.gov.au/content.asp?doc=/content/Individuals/9033.htm&page=8#H9_5

So, George, as you are the sole legal owner of the IP, you declare 100% of the rental income and expenses and you claim 100% of the deductions, including 100% of the interest since you didn't put down a cash deposit.

If you had put down a 10% cash deposit and the bank loaned you 100% of the purchase price, so that you effectively received your 10% back from the bank, then you would claim only 90% of the interest, since only 90% of the loan has gone to the vendor. That's a different scenario to yours, though.

I also agree with the others that the bank probably wanted both signatures to include your wife's income in the serviceability of the loan. If her income wasn't included you may not have qualified for the loan. Verify this with your lender or broker.

Do me a favour, next time you get advice from the ATO, ask them to quote the relevant Ruling number or legislation section so you can cross check it, either on the ATO website or a library which holds copies of the 1936 and 1997 Tax Acts.

Regards, Mike
 
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Reply: 1.2.2.1
From: Dale Gatherum-Goss


Hi Mike

Good post and I like your idea of double checking the facts, too.

However, I would be wary of taking the tax office "telephone people" at their word. Whilst they're nice people doing a good job (will that do now, your honour??) they are merely interpreting the law and do not necessarily understand that law entirely.

This is an important distinction!

The tax law is defined by the courts and not by a ruling by the tax office.

Besides which, it is often like asking an insurance person if you need insurance. Of course, you know the answer!

Dale
 
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Reply: 1.2.2.1.1
From: Mike .


Hi Dale,

Until your post, I thought it wasn't necessary to deviate from established guidelines unless the ATO flagged a change via a Ruling. However, you say one must act on court decisions which change legislation, is that correct?

Here is some info from the ATO website Legal Database:

The Legal Database is a collection of legal and policy information. Here you have access to much of the material the ATO uses when making decisions, including:

Legislation and supporting material
Public Rulings, Determinations and Bulletins
ATO Interpretative Decisions
Case Decision Summaries (details of important decisions made by the ATO)
ATO Practice Statements (directions to ATO staff on how to apply the laws administered by the Commissioner)
Tax related case law
ATO Policy Papers
Freedom Of Information.


The number, subject heading (the title), Class of person/arrangement, Date of effect and Ruling parts of this document are a 'public ruling' for the purposes of Part IVAAA of the Taxation Administration Act 1953 and are legally binding on the Commissioner. The remainder of the document is administratively binding on the Commissioner. Taxation Rulings TR 92/1 and TR 97/16 together explain when a Ruling is a public ruling and how it is binding on the Commissioner.


Commissioner of Taxation
25 July 2001


Previously released in draft form as TR 2000/D19


FOI index detail
reference number
I 1023594

ISSN 1039-0731

ATO References:
T2000/19812

References:

TR 92/1
TR 92/20
TR 97/16

Subject References:
barley growing
borrowings & loans
crops as trading stock
derivation of income
primary production income
sale of goods

Legislative References:

ITAA 1997 6-5
ITAA 1997 6-5(4)
ITAA 1997 6-10(3)
ITAA 1997 20-20
ITAA 1936 Pt IVA

Case References:

Arthur Murray NSW Pty Ltd v. FC of T
(1965) 114 CLR 314
(1965) 14 ATD 98

Barratt & Ors v. FC of T
92 ATC 4275
(1992) 23 ATR 339

Farnsworth v FC of T
(1949)78 CLR 504
(1949) 9 ATD 33

FC of T v. Australian Gas Light Co & Anor
(1983) 52 ALR 691
83 ATC 4800
(1983) 15 ATR 105

Henderson v. FC of T
(1969-70) 119 CLR 612
69 ATC 4049
(1969) 1 ATR 133

J. Rowe & Son Pty Ltd v. FC of T
(1971) 124 CLR 421
71 ATC 4157
(1971) 2 ATR 497

Dale, can you explain when and how you incorporate changes into your practice? When legislation is changed and comes into effect or when the ATO make a determination or a Tax Ruling?
What is a Public Ruling? How do you track the changes to law and tax guidelines?

Regards, Mike
 
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