Interest on Interest---with a twist

[padraig]

I have a “personal” LOC ($30k) account. The idea behind the personal LOC is to have a buffer source of funds for emergency personal expenses. My salary and also rental income from some of my IPs is paid into this personal LOC (those IPs in my own name, before I discovered trusts). Because of the regular salary and rental deposits, the personal LOC has remained in the black over the last several years. I’ve therefore used the available funds in this LOC account to pay interest on several other investment loans (loans used to purchase IPs, units in HDTs etc). Over the years I have used over $300k from the personal LOC to finance interest payments on the other investment loans i.e. to help service interest on loans used to purchase income-producing assets.

I now want to demolish my old PPOR and build a new one (this wasn’t in my original plans!). Interest on funds borrowed to finance the new PPOR will not be deductible. After a recent refinancing exercise, I have over $300k available in another LOC which I use for investment (income producing) purposes. My question is: Can I “repay” the $300k interest from my investment LOC into my personal LOC (where it is to be used for construction of the new PPOR), and claim the subsequent interest incurred on the investment LOC as deductible?

The logic I’m using is that the original $300k from the personal LOC was used for “income-producing” purposes, and therefore the $300k from the investment LOC to repay these funds to the personal LOC are also used for “income-producing” purposes—hence interest incurred is deductible. However it is not with great clarity of thought that I am applying this logic.

Is there some clear-minded forumite with the right knowledge who can say “go for it—you’re perfectly legit” or “you’re dreaming mate”. For some reason, Dale GG comes to mind!

 

[jackberai]

What does your accountant suggest?

 

[stargazer]

Hi Padraig

Whilst i haven't got the answer i would like to ask a question. I am always amazed that a number of investors indicate they put there IP rents into there personal debt account or offset etc. and only pay the interest on the Investment account.


The question i have:
If the ATO asked why you are putting your rents from you IPs into your personal account and not your investment account what response would they get. What would the ATO accept as the reason if one was audited.

I am asking this in the spirit that a few accountants i have enquired with have discouraged i do this and any rents i get from my IPs should go into my investment LOC account.

Cheers
BC

 

[kathryn d]

The question i have:
If the ATO asked why you are putting your rents from you IPs into your personal account and not your investment account what response would they get. What would the ATO accept as the reason if one was audited.

I am asking this in the spirit that a few accountants i have enquired with have discouraged i do this and any rents i get from my IPs should go into my investment LOC account.

Cheers
BC

I know I'm answering from a Canadian perspective.
From what I have read, rent is considered personal. It is mine to do with what I am pleased to do.
I would like to assume it would be the same for you.
Many times I have used my rental income to pay for personal bills only to turn around and charge any expense that may be business related.

 

[Rolf Latham]

Hiya BC

Your rent can go where you want it to in my experience.

The accts that are suggesting otherwise might be doing so simply because of book keeping reasons.

ta
rolf

 

[rambada]

What you are looking at is a cash flow system. A business can have an income account and an expenses account. If the expenses account is an OD, so what? Its purpose is for the production of an income. We have run an IP cash flow structure like this for years and our accountant has no problems with it.