Interest on Interest and Capitalising Interest - the Facts

[Insan3]

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In your case, compound interest will be incurred on funds borrowed, under a line of credit facility, to acquire an income producing asset. As such, the compound interest will be incurred in earning assessable income and will be an allowable deduction.[/I]

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Hi Rod_WA - I've read the ruling you attached, and found it interesting that they don't go into detailing what the Investment income will be used for - Which is pretty much what SamA was implying....

Does anyone know of a ruling where they have specifically stated that Investment Income can/cannot be used to pay off Private borrowings before Investment borrowings? From this ruling, it appears they don't care what the investment income is used for, just the purpose of the loan.

Hart's of course was different, as it was capitalised and a split facility of the one loan essentially from my understanding.

 

[TAG]

Which Bank is well versed to set up a Loan structure as suggested above

Hi Corsa,

Excellent post!

I find that the challenging I am facing is finding a bank that has the knowledge to set up the correct accounts for a LOC and the respective accounts.

Corsa or anyone who has a great experience with their bank, please recommend any good banks that do this setup without you to teach them what to do.

Thanks for everyone's input so far

TAG

 

[Rixter]

TAG, you have to tell them.....they are only bank employees who only know how to fit round pegs in round holes because thats bank policy.

If they knew any different they wouldn't be employees very long.

 

[TAG]

Rixter,

So who do you bank with? I am currently with CBA and the Lending manager has very little knowledge. Thinking of finding another RM in the same bank?

TAG

 

[Rixter]

Rixter,

So who do you bank with? I am currently with CBA and the Lending manager has very little knowledge. Thinking of finding another RM in the same bank?

TAG

I use Investment savvy mortgage brokers to find the banks/lenders and appropriate loan products to fit my needs.

I spread my banks/lenders to minimise my exposure risks and increase negotiation power.

Currently I use products belonging to Westpac, RHG, & Citibank.

Hope this helps.

 

[mixedup]

Use of personal savings for IP loan offset??

Is it possible to somehow use my personal savings (~$10k - $15k, a buffer so to speak) to offset interest in my IP loan?

That is noting that I will want to use this money for personal use at some stage in the short/medium term. Note I have no debt on my PPOR, only debt on IP. It would be nice to think it could sit in a personal offset account that is linked to my IP loan, but I'm not sure if this is allowed, or complicates the tax return.

 

[7DD4]

Another diagram example

Just put this together any comments or ideas would be great, as I am about to put the structure in place after reading reading and reading current posts.

Cheers
David Perth WA

 

[BV]

Just put this together any comments or ideas would be great, as I am about to put the structure in place after reading reading and reading current posts.

Cheers
David Perth WA

David,

2 points,
1. I wouldn't top up the LOC from the offset, I would rather increase the LOC using IP equity.
2. I wouldn't capitalise the interest on the LOC, I'd remove the loop and extend the LOC interest line to the offset account.

Cheers

 

[Rixter]

Thanks for sharing David.

As you can appreciate, there is no right or wrong way. Just different ways that can be chosen and best suits ones circumstances, personal risk profile and preference.

 

[gooram]

Rixter,

So who do you bank with? I am currently with CBA and the Lending manager has very little knowledge. Thinking of finding another RM in the same bank?

TAG

TAG, I'm CBA and I set this up with my bank manager relatively pain free. I made an appointment, decribed exactly what it is I wanted and why, and he understood.
Of course, bank managers are busy and they may forget things, so I suggest you get their email or direct phone number so you can follow up. I used email because that enabled me to follow up immediately after the meeting with everything we discussed. This made things much easier to track as we had an audit trail.
What I did was refinance current PPOR and 2 IPs into the following:
PPOR - standard loan with offset, interest deducted from
LOC - secured against PPOR - interest capitalised (as they do)
IP1 - IO loan, interest payments deducted from LOC
IP2 - IO loan, interest payments deducted from LOC
At the same time un-crossed both IPs as the were linked with the PPOR, and now they have enough equity to be standalone loans.

So not a trivial exercise, it did take a few reminders and a few goes at it but the whole process took less than a week.

 

[gooram]

Is it possible to somehow use my personal savings (~$10k - $15k, a buffer so to speak) to offset interest in my IP loan?

That is noting that I will want to use this money for personal use at some stage in the short/medium term. Note I have no debt on my PPOR, only debt on IP. It would be nice to think it could sit in a personal offset account that is linked to my IP loan, but I'm not sure if this is allowed, or complicates the tax return.

You can totally do this. It won't complicate things, but it will affect your return because you'll be paying less interest. But that's fine.

I'm with CBA and their offset facility, MISA, is not very flexible yet, so you'll need a regular account for day to day access, then a "savings" account which is your offset account.

 

[MJK]

It seems most agree that business expenses and interest can be paid by an external source be it LOC, or another loan and the interest on the LOC can be capitalised within its limit.

This reduces the need to fund business expenses from income.

So the question is.....can all business income then be used to pay down personal debt, rather than fund business expenses?

ie. rents, dividends paid to PPOR debt?

Most would argue that you can do whatever you like with your income.

MJK

 

[MJK]

It's not OK to capitalise interest on an IP loan, but it's OK to pay the interest on an IP loan using a Line of Credit and capitalise the interest on the LOC. Right?

So... if the same amount of interest is being capitalised, why is this capitalised interest tax deductible if it's in the LOC, but not if it's in the IP loan?

- - - - -

It's not OK to deposit all IP rental income into a PPOR loan, but it's OK to deposit all rental income into an offset account attached to the PPOR loan. Right?

So if the same IP rental income is being used to reduce the non-deductible interest on the PPOR loan, why is this OK when the rental income sits in an offset account, but not OK if it goes directly into the PPOR loan?

- - - - -

I'm just trying to look at this from an ATO perspective. If they allow one method, why don't they just allow all IP loan interest to be capitalised directly, and all rental income to go diectly into the PPOR loan? That is what is effectively happening with the structure suggested anyway, so why do we need the complex structure to make it acceptable to the ATO?

Cheers,

Shadow.

I dont think these questins where answered. I for one would really like to know peoples thoughts.

MJK

 

[MJK]

David,

2 points,
1. I wouldn't top up the LOC from the offset, I would rather increase the LOC using IP equity.
2. I wouldn't capitalise the interest on the LOC, I'd remove the loop and extend the LOC interest line to the offset account.

Cheers

HI BV,

If your still reading this...why would you do what you've suggested at point 2?
I would have thought the whole purpose was to capitalise something somewhere?

MJK

 

[jamyi]

May I ask one more question here.
Instead of using LOC, can I just apply for a new Loan with offset account, and initially put all the loan amount into the offset account, so there will be no interest charged at first. Then I start to use the money from this offset account to pay for the IP Loan interests?

Thanks

 

[Rixter]

May I ask one more question here.
Instead of using LOC, can I just apply for a new Loan with offset account, and initially put all the loan amount into the offset account, so there will be no interest charged at first. Then I start to use the money from this offset account to pay for the IP Loan interests?

Thanks

You sure can !

This is a far better way IMHO

 

[MJK]

May I ask one more question here.
Instead of using LOC, can I just apply for a new Loan with offset account, and initially put all the loan amount into the offset account, so there will be no interest charged at first. Then I start to use the money from this offset account to pay for the IP Loan interests?

Thanks

Thats what I have set up now also.

MJK

 

[ziggy2214]

HI BV,

If your still reading this...why would you do what you've suggested at point 2?
I would have thought the whole purpose was to capitalise something somewhere?

MJK

MJK

I think what he means is that by doing so you are paying interest on interest
That's the part that the ATO does not like.
If you had a separate LOC2 and paid the interest on LOC1 from that
there wouldn't be a problem.
Don't quote me on this though, check with ur accountant

Thanks

 

[ziggy2214]

You sure can !

This is a far better way IMHO

Rixter

What is the advantage of using an offset instead of a LOC please?

Thanks

 

[MJK]

MJK

I think what he means is that by doing so you are paying interest on interest
That's the part that the ATO does not like.
If you had a separate LOC2 and paid the interest on LOC1 from that
there wouldn't be a problem.
Don't quote me on this though, check with ur accountant

Thanks

If you pay the LOC from the offset that is offsetting your PPOR you are losing the whole benifit of minimising personal debt?

MJK