Interest in advance

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From: KJL .


Happy Friday everyone.

I recently got hold of a brochure from some outfit called "Which Property?", that spoke of borrowing and prepaying your first year's interest on an IP then claiming all as a deduction before June 30.

Now I've thought about it as much as I can manage, but when I think about tax too long my ears start to bleed. Bearing in mind I'm not the sharpest tool in the box, can anyone tell in simple terms why this borrowing and prepayment would be a good idea?

KJL
 
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Reply: 1
From: Glenn Mott


Hi KJL

I don't know if your an accountant or not (your kpmg email address gives an
indication) but I would suspect that if you bought a property on the 1st of
June then paid 1 years interest in advance on the 15th of June then claimed
that full amount, your accountant would let you know that as you had not
owned the property for the entire financial year, he/she would have to
factor your payment by the amount of days in that financial year that you
owned the property. Also, I am starting to wonder if paying things in
advance is useful at all when compared with long term balanced budgeting and
cashflow.

Glenn
 
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Reply: 2
From: Lotana Von Amor


Let me disagree with this opinion. To the best of my knowledge, the tax law allows immediate deduction for pre-paid expenses for up to 12 months in advance. This relates to any expense that would be deductible under normal circumstances (e.i. not pre-paid). As an example consider a full year building insurance premium paid in June and deducted in the financial year when it was paid. This practice is typical for other lending products, such as margin loans. For investment loan interest to qualify for pre-payment deduction it must be a fixed rate for the prepayment period. Margin lenders advertise lower rates for prepaid interest. I expect that in the next 6-12 months mortgage lenders will do the same for fixed rate investment loans.

Say cheese,

Lotana
 
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Reply: 3
From: Dale Gatherum-Goss


Hi KJL

It is merely another tool at your disposal. This strategy will make sense to some and will not make sense to another.

However, if your income for 2003 will be much more than 2002 because of a Capital gain, or you are going overseas next year then it makes more sense to get a tax benefit of 48.5% of the interest than at say 18.5% or 31.5%.

Dos this help?

Cheers

Dale
 
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Reply: 3.1
From: KJL .


Dale - yes that helps. I think I get it more now, I initially thought it might be something tremendous I was missing out on, but now I don't particularly think it is. Although if you're going to take time off to, say, have a baby, I could see that if you pay the current year and also the year in advance that would be useful?

Glenn - I'm not an accountant and I take that comment personally... :0p

KJL
 
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