Interest on expenses tax deductibility

[Dean2012ad]

Senstie, your setup should easily be tax deductible, obviously avoiding mixing business/investment and personal funds in the same account.

I received a private ruling on a similar yet more primative setup using a investment loan with a redraw facility. I was able to redraw funds into a seperate simple savings account to be used for investment related expenses such as rates, insurance etc.

In much the same way a 'new borrowing' of $40k taken from the loan into a offset account to pay 'investment expenses' would be considered deductible.

The only issue the ATO would have (which they seem to chuck in most private rulings related to this) is related to Hart's case and tax avoidance schemes which doesn't really relate to your situation. Either way, a private ruling would be benficial if you're worried or if an accountant can't give you an answer.

 

[sentsie]

Thank You Dean2012ad., I will look at the private ruling.

I think it will apply to Stinadaze as well as it looks like similar scenario.

Also, after long read at Domjan's case (Terryw):
http://www.austlii.edu.au/au/cases/c.../2004/815.html
It looks like the set up is ok, as long as it is not contaminated (from the beginning) and always aware of TR2000/2 tax ruling, ie : only claim the interest portions on the fund spent on the IP/Business expenses.

Paragraph 29 : "......... The Commissioner contends that amounts redrawn from a loan such as this constitute a new borrowing of funds. His views are set out in Taxation Ruling TR2000/2 – “Income tax: deductibility of interest on moneys drawn down under line of credit facilities and redraw facilities” – issued on 1 March 2000 ...... "

and Paragraph 44 : "......... The Commissioner relies on this authority to submit that once an amount of money is deposited into an account that already contains funds the account becomes a mixed pool of funds and it is not possible to determine the source of each withdrawal. It is impossible to determine whether the funds used to pay an otherwise deductible expense are sourced from the monies at interest or whether the funds used are sourced from Mrs Domjan's own monies......."

I will check Hart's case as well.

Regards.

 

[Terryw]

Hart's case involved a scheme which enabled a connected loan product to capitalise the interest on the investment portion and thereby divert funds to quickly pay off the non-deduction home loan portion. Does really relate to this offset account model, and it doesn't specifically apply to the capitalising of interest.

Federal Commissioner of Taxation v. Hart (2004) 217 CLR 216 [2004] HCA 26
http://www.austlii.edu.au/au/cases/cth/HCA/2004/26.html

 

[Terryw]

If you are concerned about whether interest on interest would be deductible have a look at:
TD 2008/27
http://law.ato.gov.au/atolaw/view.htm?docid=TXD/TD200827/NAT/ATO/00001
which basically says the principles governing the deductibility of compound interest are the same as those governing the deductibility of ordinary interest.

This means if the loan is deductible then the interest on interest of that loan would normally be deductible.

But, don't forget the ATO has powers under Part IVA of the ITAA to disallow a deduction if it is a scheme with a dominant purposes of getting a deduction. See Hart's case for the definition of a scheme and see the next TD for confirmation that the ATO can apply Part IV to this:

TD 2011/D8
"Income tax: does a taxpayer's purpose of 'paying their home loan off sooner' mean that Part IVA of the Income Tax Assessment Act 1936 cannot apply to an 'investment loan interest payment arrangement' of the type described in this Taxation Determination?"
(answer was no, Part IVA can apply)
http://law.ato.gov.au/pdf/pbr/td2011-d008.pdf
http://law.ato.gov.au/atolaw/view.htm?docid="DXT/TD2011D8/NAT/ATO/00001"

Also have a look at this private rulings regarding capitalising interest:

PBR 93707
http://www.ato.gov.au/rba/content.asp?doc=/RBA/Content/93707.htm


PBR 93035
http://www.ato.gov.au/rba/content.asp?doc=/RBA/Content/93035.htm

PBR 94313
http://www.ato.gov.au/rba/content.asp?doc=/RBA/Content/94313.htm

PBR 1011345133229 (not allowed!)
http://www.ato.gov.au/rba/content.asp?doc=/RBA/Content/1011345133229.htm

 

[sentsie]

If you are concerned about whether interest on interest would be deductible have a look at:
TD 2008/27
http://law.ato.gov.au/atolaw/view.htm?docid=TXD/TD200827/NAT/ATO/00001
which basically says the principles governing the deductibility of compound interest are the same as those governing the deductibility of ordinary interest.

This means if the loan is deductible then the interest on interest of that loan would normally be deductible.

But, don't forget the ATO has powers under Part IVA of the ITAA to disallow a deduction if it is a scheme with a dominant purposes of getting a deduction. See Hart's case for the definition of a scheme and see the next TD for confirmation that the ATO can apply Part IV to this:

TD 2011/D8
"Income tax: does a taxpayer's purpose of 'paying their home loan off sooner' mean that Part IVA of the Income Tax Assessment Act 1936 cannot apply to an 'investment loan interest payment arrangement' of the type described in this Taxation Determination?"
(answer was no, Part IVA can apply)
http://law.ato.gov.au/pdf/pbr/td2011-d008.pdf
http://law.ato.gov.au/atolaw/view.htm?docid="DXT/TD2011D8/NAT/ATO/00001"

Also have a look at this private rulings regarding capitalising interest:

PBR 93707
http://www.ato.gov.au/rba/content.asp?doc=/RBA/Content/93707.htm


PBR 93035
http://www.ato.gov.au/rba/content.asp?doc=/RBA/Content/93035.htm

PBR 94313
http://www.ato.gov.au/rba/content.asp?doc=/RBA/Content/94313.htm

PBR 1011345133229 (not allowed!)
http://www.ato.gov.au/rba/content.asp?doc=/RBA/Content/1011345133229.htm

Thanks Terry for all the links & info

Could you repost the last 4 links for private ruling please, its error file not found.

Regards.

 

[Terryw]

Thanks Terry for all the links & info

Could you repost the last 4 links for private ruling please, its error file not found.

Regards.

Those PBR links are not working now (I had them saved previously). You could probably find them by doing a search on the ATO website.

 

[sentsie]

If you are concerned about whether interest on interest would be deductible have a look at:
TD 2008/27
http://law.ato.gov.au/atolaw/view.htm?docid=TXD/TD200827/NAT/ATO/00001
which basically says the principles governing the deductibility of compound interest are the same as those governing the deductibility of ordinary interest.

This means if the loan is deductible then the interest on interest of that loan would normally be deductible.

But, don't forget the ATO has powers under Part IVA of the ITAA to disallow a deduction if it is a scheme with a dominant purposes of getting a deduction. See Hart's case for the definition of a scheme and see the next TD for confirmation that the ATO can apply Part IV to this:

TD 2011/D8
"Income tax: does a taxpayer's purpose of 'paying their home loan off sooner' mean that Part IVA of the Income Tax Assessment Act 1936 cannot apply to an 'investment loan interest payment arrangement' of the type described in this Taxation Determination?"
(answer was no, Part IVA can apply)
http://law.ato.gov.au/pdf/pbr/td2011-d008.pdf
http://law.ato.gov.au/atolaw/view.htm?docid="DXT/TD2011D8/NAT/ATO/00001"

Also have a look at this private rulings regarding capitalising interest:

PBR 93707
http://www.ato.gov.au/rba/content.asp?doc=/RBA/Content/93707.htm


PBR 93035
http://www.ato.gov.au/rba/content.asp?doc=/RBA/Content/93035.htm

PBR 94313
http://www.ato.gov.au/rba/content.asp?doc=/RBA/Content/94313.htm

PBR 1011345133229 (not allowed!)
http://www.ato.gov.au/rba/content.asp?doc=/RBA/Content/1011345133229.htm

This new Tax Draft TD 2011/D8 may cost many PIs dearly, once it becomes a tax ruling.
Generally, how long a tax draft will become a tax ruling ? and will it affects the previous relevant private tax ruling ?

 

[hayleye0]

Hi.. I apologise in advance for my ignorance..... But in relation to the above conversation, I'm after your extensive knowledge for my quite simple situation.

I have recently borrowed 30k to completely renovate an IP, the loan was funded into my everyday transaction account, I then transferred it into a savings account, which also had a small amount of personal money in it. Over the last two months I have paid all accounts etc from the account (we are owner builders) so are paying for materials etc. Does this mean this loan which I assumed I could claim the interest on, I may not able to due to the 'source' of the funds?

I would appreciate any advice on what I may be able to do.

By the way there will be no money left in the account (mine or the loan) once the reno is complete...

Thanks in advance

 

[Terryw]

Hi.. I apologise in advance for my ignorance..... But in relation to the above conversation, I'm after your extensive knowledge for my quite simple situation.

I have recently borrowed 30k to completely renovate an IP, the loan was funded into my everyday transaction account, I then transferred it into a savings account, which also had a small amount of personal money in it. Over the last two months I have paid all accounts etc from the account (we are owner builders) so are paying for materials etc. Does this mean this loan which I assumed I could claim the interest on, I may not able to due to the 'source' of the funds?

I would appreciate any advice on what I may be able to do.

By the way there will be no money left in the account (mine or the loan) once the reno is complete...

Thanks in advance

There is not much you can do now. At least console yourself that probably 80% of people taking out extra money are setting it all up wrongly.

 

[hayleye0]

Thanks Terryw! Other than the cases above, does the ATO have a publications etc that explains this?

As I'm sure i'm not the only stupid person that didn't know this??

The reno is going to cost more than the borrowed 30k (owner builders... suprise, suprise!) Would this go anyway to prove this is what the loan was actually spent on? Thanks again

 

[Rolf Latham]

I believe one of the core issues with Domjan v ATO was the contamination of personal and unappropriated funds in a savings acct, mixed with personal expenses and borrowed money. There was no nexus between the mixed funds and the investment use, hence the tribunals decision, common sense really.

If the offset acct is kept clean of tax paid, post tax dollars ( eg wages), and not used for any personal expenses, and only used for IP related things, the combined structure is similar to a LOC.

The ATO will be hard pressed to force a borrower to use a loan product such as a WBC loc that has a "repayable on demand" clause on it .

Seek specific and personal advice though pls

ta
rolf

 

[eggnog]

Interesting that you mentioned Post tax dollars Rolf. Would interest from a LOC still be deductable if the LOC funds were parked in an offset account that also received the monthly rent?

Does anyone know how to get a PBR. Do I have to see a lawyer or accountant for this or do I just go to the ATO.

 

[Terryw]

Interesting that you mentioned Post tax dollars Rolf. Would interest from a LOC still be deductable if the LOC funds were parked in an offset account that also received the monthly rent?

Does anyone know how to get a PBR. Do I have to see a lawyer or accountant for this or do I just go to the ATO.

Technically borrowed funds are no longer borrowed funds when they are placed into a savings account.

Whether the ATO will be this strict with enforcement is another matter.

How to apply for a private ruling:
http://www.ato.gov.au/businesses/content.aspx?doc=/content/34047.htm&mnu=42793&mfp=001

 

[eggnog]

Thanks hugely Terry. Just had a look at the PBR application forms and process. Always thought it to be quite daunting and belonging to the suits and white collars of the world but it is actually very straight forward and simple. Might have to get me a whole string of PBRs

 

[mattnz]

So even if your rent money goes into the offset account, this is seen as contaminated?

Its ridiculous that they make things so complex for everyone. The whole tax system needs an overhaul to make things simple.

 

[Terryw]

So even if your rent money goes into the offset account, this is seen as contaminated?

Its ridiculous that they make things so complex for everyone. The whole tax system needs an overhaul to make things simple.

I don't think it is complicated. It is logical really. If you borrow money for an investment then the interest would be deductible. If you borrow to put into a savings account then it is no longer borrowings.

 

[Terryw]

Thanks hugely Terry. Just had a look at the PBR application forms and process. Always thought it to be quite daunting and belonging to the suits and white collars of the world but it is actually very straight forward and simple. Might have to get me a whole string of PBRs

Just have a look at some of the links above, or do a search on the numbers, and see some actual private rulings which may help you phrase your questions.

 

[mattnz]

I don't think it is complicated. It is logical really. If you borrow money for an investment then the interest would be deductible. If you borrow to put into a savings account then it is no longer borrowings.

Isn't a savings account an investment though? It makes a return and you pay tax on the interest.

 

[Aaron_C]

Isn't a savings account an investment though? It makes a return and you pay tax on the interest.

An investment entails the acquisition of a capital asset. Cash/savings is not a capital asset so it doesn't get a deduction for the interest incurred because nothing was acquired.

 

[Rolf Latham]

I don't think it is complicated. It is logical really. If you borrow money for an investment then the interest would be deductible. If you borrow to put into a savings account then it is no longer borrowings.

Depends on how far one wants to take it really...................I agree its important to get personal and specific advice to be sure.

For discussion purposes only then, applying the strict direct nexus model, no loan of any sort used for buying property is ever tax deductible.................... because of the needed flow of funds from a business perspective.

Even at purchase, when you take a loan and the lender distributes funds on your behalf, the funds do NOT directly come from your account to the seller.

In most cases the funds come from a bank cheque account that your lender has, or worse still from your non bank lenders trust account, or your banks solicitors trust account.........

Even if u have a LOC with a personal cheque book attached, you cant settle a property purchase with that cheque in almost all cases.

Ridiculous assertion I know.............but, in almost all cases the borroweed money never flows directly from the loan account to the investment, whats worse, "ownership" of the money changes along the way.

Being mindful that an offset account by definition isnt a savings acct in isolation, but is a linked structure directly linked to the associated loan.

The primary purpose of the linked structure being such that you only pay interest on the net balance between the loan account and the offset, ie you only pay interest on the funds used.

Common uses of this structure are. 1. for a Home owner to save interest. 2. For an investor to have access to a LOC style structure where a LOC product is not suitable or available.

If the STRUCTURE is operated as recommended, at the extreme, that only borrowed money ( from the associated loan) should ever sit in the offset account, one wont fall into the trap that Mrs Domjan did.

The below is the logic applied in the Domjan case, and it makes sense.

“I accept the Commissioner's submissions. Where the funds have been intermingled it is impossible to
determine the use to which they have been put. In other words the purpose of the borrowing cannot be
ascertained. It cannot be said that the expenditure – that is the payment of interest – has been incurred in the
course of gaining or producing assessable income”

I repeat that people need to get their own specific and personal advice until there is some clear resolution.

In some ways this discussion is more open than the "is capitalising interest deductible". At least there are a few cases that you can rely on to self assess your exposure.


ta
rolf