So does that mean that capitalising interest (when you can afford to pay it) is a highly risky practice that might put you in hot water with the ATO ?
Clearly this hasn't been really tested yet by the ATO in court (besides Hart's case which is a totally different scenario) but it seems like many investors here could get burnt esp if any ruling is retrospective !
Exactly and therein lays the risk.
Thankfully I don’t have PPOR debt any more but I can understand the opportunity to reduce bad debt makes these setups tempting but please consider the risk.....
Whilst I don’t fully understand this thread I do know in the past, these technically legal, loop holes have been closed when the ATO realises the amount being lost as the populous comes on board.
For instance I remember:
In late 1990's a friend with US connections telling how he could earn $100k plus in AUS and paid no tax via a holding company in the Bahamas and paying everything via credit card. Last year this setup was blown open by the ATO and many serious big wigs have court cases pending.
The early 2000's saw one of the banks (Westpac?) come up with a loan structure where the IP rent got paid off your PPOR and they capitalised the interest on your IP. Debt stays the same level but became all IP and hence tax deductible. This was debated her on SS and was legit. But the ride lasted 18 months until the ATO ruled invalid and those who did it got a nice audit for the privilege (as reported).
Recently the Hybrid Discretionary Trust was promoted including some authors with titles like “legally reduce your tax". Allow to Neg Gear via Trust, all the gain with out the pain. Many here took it up and now the ATO has made a few noises saying this may not be kosher and most conservative accountants and some IP gurus don’t recommend this structure. I think the jury is still out on the final ruling?
These three are in my time. Prior to my investing career there was some tax scheme called “Bottom of the Harbour”. I don’t know the details there but it was closed with much fanfare.
So my point is: there are legal, technical, loopholes in the tax system that you can use to provide a significant above average rebate. However please be mindful that history has shown that if too generous they will be targeted and closed. Just consider that when capitalising interest as it is likely by say 2009/10 it would be closed and the ATO may have an unhealthy interest in your affairs.
This is not to be negative but advise caution. A future change may not be a concern and the gain may well outweigh the cost of restructure or audit fees, assuming no penalty.
However, any audit is black and white. My Company was random audited by NSW Workcover. They went back five years, assessed income and payments worth well over $1.5M and I had to provide all the documents and receipts and stat decs to prove my position. In accountant fee alone it cost $1000. In time lost to documentation who knows? Probably a week in total time over the process which went on for almost a year. In the end all they found was I had under claimed my personal wages $1k in one year (no the don’t count over claimed in next year as credit) and that meant an underpayment of around $20 which incurred a fine of (wait for it) $9! In the end the WC system would not allow me to pay the fine easily so they waived it if I simply paid the $20. On the books WC found an error and kept another employer honest.
For me it took a year, $1k in accountant fee and a loss of $2k in my consulting fee lost to it and a hell of a lot of stress.
So I certainly would not want to be cleared by the ATO on the cap interest only to be fined for other technicality such as not having full and correct doc receipts or one too many IP related travel claims. I assume tax audit would make the one above look like a trip to Disneyland.
Again I have not read all of this and I respect the opinion of Corsa (thread starter) as a person of intelligence and expertise in the area of IP. It may be worthwhile but I advise caution as it is you, not the accountant who advised you, that gets the rap when the ATO comes calling.
Regards, Peter 14.7
