Is this LOC interest tax deductible?

Hi everyone

I have been reading with interest a thread that was talking about some banks wanting IP loan interest repayments to be paid only from accounts held with the same bank. See - http://www.somersoft.com/forums/showthread.php?t=58576

I have a new IP loan with NAB and they have insisted on interest repayments being deducted from our (new) NAB offset account. However, the funds we want to use for this purpose are held in an ANZ LOC.

My question is this... The ANZ LOC deals with all the other income and expenses for the IP, so naturally I want the interest repayments to come from this account. If I set up a regular internet transfer of funds from my ANZ LOC into the NAB offset account (enough to cover the monthly interest repayments) can I still claim the interest charged on the LOC that relates to the transferred amount? Clear as mud??...:confused:

If I was able to pay the repayments direct from the ANZ LOC to the NAB loan account the relevant LOC interest would be tax deductible. I realise paying the money into the offset account is a cash advance. However the offset account in question is not used for any personal banking and has only ever had money paid into it to cover the interest repayments. No other transactions are put through this account.

Any thoughts? (mine are all jumbled!)

Angela :)
 
Hi,

Yes, your interest payments will still be tax deductable, whereever the money comes from. The ATO looks to the purpose of the loan.

As to having money come out of the NAB offset, this is just silly. Possibly, while you are setting the mortgage up, you may need do as they say and have it come from your NAB (although I was told the same story be another bank, but when they sent me the form, there was a section on setting up direct debits from another bank, so I filled that section in instead).

But once the loan has settled, you should be able to go into any branch and change the account the money is coming from with no trouble.

Jas
 
Hi Jas

Thanks for the reply. The loan was actually settled a couple of months ago. I have been transferring enough money each month into the offset account to cover the interest repayments. I have been into two different NAB branches and both have told me that they can't take the interest payments from my ANZ LOC. I can't understand why I can't set it up as a direct debit.

Yes, your interest payments will still be tax deductable, whereever the money comes from. The ATO looks to the purpose of the loan.

I'm still a little confused. The interest on the actual loan account I agree will be tax deductible, as the purpose of the loan was to purchae an IP. However I am unsure whether the interest that I will pay on the funds taken out of the ANZ LOC will be tax deductible? I am using borrowed funds (from the ANZ LOC) to pay the interest repayment on the IP loan. Would the LOC interest applied to this funds transfer to the offset still be tax deductible? Thanks.

Angela
 
you want to make sure you can establish that you are borrowing from the LOC for the property expense, interest in this case.

What you are doing is borrowing to fund an offset savings account initially, and the money is direct debited from there.

I think this should be ok, but to make it stronger I would suggest you no use the offset account for anything else.

Better run it by your tax advisor.
 
Thanks for the reply Terry.

you want to make sure you can establish that you are borrowing from the LOC for the property expense, interest in this case.

I have made sure that both the ANZ LOC and the NAB offset have only ever had transactions going through them that relate directly to the IP. Hopefully this will make my case for tax deductibility a strong one. Thanks for the feedback.

Angela :)
 
I recall a case where the person lost an appeal against an ATO decision to not allow their claim of interest deductions because they mixed the borrowed funds with private funds when they deposited the money in a savings account temporarily, maybe to write a cheque. I think it may have been the Domjan case and it may be worth a read as I think it was stated or implied that they would have been ok if the savings account didn't already contain funds.
 
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