LMI deductible for scenario ??

[s0805]

Hi there,

I am in process for releasing the equity from existing IP as separate split to fund the next purchase. Need to borrow above 80% for equity release hence LMI payable.....lender has advised that LMI payable will be added to separate split.....Plan is to 10% deposit for new IP + stamp duties + BA fees (if any)
+ solicitor + building inspections out of this split....Loan will be settled in 14-15 yr and will be sitting in redraw until needed...

Just wondering if i didn't make the new IP purchase before Jun 15 then will I loose the LMI deductibility....as loan was settled in 14-15 yr
but property was purchased in 15- 16 yr.......

also paying BA, solicitor, inspection fees from this equity release does not affect its deductibility or does it?

cheers

 

[Rolf Latham]

LMI for Investment purposes is typically depreciable over 5 years.

id say you should be fine for a part claim at least.......... but its likley there will be some lack of concensus on the nexus and a PBR may be required to clear the grey

ta
rolf

 

[Terry_w]

If you don't buy in the same financial year then you won't be able to claim any LMI. There is also a question of why you are borrowing without a property and this weakends the nexus as Rolf says. Best to wait I would think.

 

[s0805]

Thanks Rolf & Terry....

How am i breaking nexus between LMI & investment purpose here...I get that both transactions hasn't happened in same Fin year....at the end of the day LMI paid on the loan is used for investment purposes only....grey area for sure....

to refresh memory....what date is taken in consideration for IP purchase...Contract date? Settlement date?

 

[Terry_w]

An expense of LMI may be incurred Jan 1, and then a property purchased July 2. Long time between incurring and using.

relevant date would be the date of payment not necessarily exchange or settlement date.

 

[Rolf Latham]

An expense of LMI may be incurred Jan 1, and then a property purchased July 2. Long time between incurring and using.

relevant date would be the date of payment not necessarily exchange or settlement date.

so a 6 mths extended settlement or any OTP scenario is in big trouble for borrowing costs or indeed deductability of deposit ?



ta
rolf

 

[Terry_w]

so a 6 mths extended settlement or any OTP scenario is in big trouble for borrowing costs or indeed deductability of deposit ?



ta
rolf

I am not saying it wouldn't be deductible, but that the connective between the borrowing and the earing of income is less than direct.

The difference with off the plan or extended settlement is that there is a property found already and contracts entered into. In this case with have LMI incurred on loan A secured by property A with the purpose being some future investment which doesn't yet exist. At a later date property B is found with loan A being used as the purchase, but the LMI incurred at a much earlier time.

 

[Rolf Latham]

Im glad you are the tax guy

blech

ta
rolf

 

[s0805]

relevant date would be the date of payment not necessarily exchange or settlement date.

Thanks Terry. So when I've loan ready with LMI topped up on that (e.g. in Feb) pay BA fees (before Jun 30).....then i could prove that money was used for investment purposes....and property itself can be signed/purchased after Jun 30.

I am not claiming the entire loan in the current Fin year but part of it e.g. (10K) which was used to hire buyer's agent services claimable in current Fin year.....all I've to make sure that I am using same $ amount....(e.g. LMI = 10K = Buyer's agent fees)

 

[Paul@PFI]

Buyers agent fees aren't deductible... If its a capital expense for the IP acquired then it adds to the cost base and the interest is deductible. The key issue would be a completed contract.

If the BA fee is prepaid prior to a contract to purchase (ie its paid in advance) I don't see the interest as deductible and possibly the BA fee is not an element of the future cost base either. Others may disagree. Nexus between it being a element of cost base and it being preliminary expenditure is my concern.

I would avoid incurring costs that appear preliminary to an acquisition.

 

[s0805]

thanks Paul. I should've explained it better. I am releasing equity from the existing property to fund the next purchase..
from this release I am planning to pay BA fees (e.g. $10K) + Solicitor fees + 20% deposit + duties for next purchase.

what I mean by claiming BA fees is that interest on the $10K, i understand BA fees itself is the capital cost and adds
to cost base. This way I can get the best out of the both worlds...claim interest on 10K as well as add that to cost base
when selling....any issues here?

The key issue would be a completed contract.

so is it settlement date? OR contract date (signed by bothe parties)?

Nexus between it being a element of cost base and it being preliminary expenditure is my concern.

I would avoid incurring costs that appear preliminary to an acquisition.

Just so i understand what is the issue with nexus here? Most BA charges initial fee and rest later on. So i can give 3K to BA (e.g. Feb 14) they go shopping possible outcomes...

--> if we signed contract before Jun 30 and deposit paid then all good cause every transaction is in one FIN year....
--> if we signed contract after Jun 30 and deposit paid then transactions split across two FIN years...this becomes tricky

thoughts...

 

[Paul@PFI]

thanks Paul. I should've explained it better. I am releasing equity from the existing property to fund the next purchase..
from this release I am planning to pay BA fees (e.g. $10K) + Solicitor fees + 20% deposit + duties for next purchase.

what I mean by claiming BA fees is that interest on the $10K, i understand BA fees itself is the capital cost and adds
to cost base. This way I can get the best out of the both worlds...claim interest on 10K as well as add that to cost base
when selling....any issues here?

so is it settlement date? OR contract date (signed by bothe parties)?



Just so i understand what is the issue with nexus here? Most BA charges initial fee and rest later on. So i can give 3K to BA (e.g. Feb 14) they go shopping possible outcomes...

--> if we signed contract before Jun 30 and deposit paid then all good cause every transaction is in one FIN year....
--> if we signed contract after Jun 30 and deposit paid then transactions split across two FIN years...this becomes tricky

thoughts...

No issues...Always best if the new loan is a sub account so its not blended in with other borrowings.

Contract date is CGT date.

Contract must come before expense or it may be preliminary. ie too early. Paying a BA now for a future service isn't likely a CGT costbase element. Maybe.

 

[s0805]

Contract date is CGT date.

Thanks but

Contract date = CGT (Capital Gain tax) date????? When you buy property i thought there were two critical dates....Contact exchange date (when both parties signed section 32 or relevant doc) and Settlement date (Total money exchange occurs)....

Contract must come before expense or it may be preliminary. ie too early. Paying a BA now for a future service isn't likely a CGT costbase element. Maybe.

can u elaborate on this pls....so paying BA now to go for shopping and find something for us can be claimed in tax (i.e. interest) but won't be added to CGT? How early is too early???

 

[Terry_w]

What is your question about date in relation to? CGT is based on the date of the contract not settlement.

buyers agent fees are not deductible against income, but could be against capital gains tax.

 

[Paul@PFI]

Thanks but

Contract date = CGT (Capital Gain tax) date????? When you buy property i thought there were two critical dates....Contact exchange date (when both parties signed section 32 or relevant doc) and Settlement date (Total money exchange occurs)....



can u elaborate on this pls....so paying BA now to go for shopping and find something for us can be claimed in tax (i.e. interest) but won't be added to CGT? How early is too early???

Whhaaaaa....
1. Buyers agent NEVER deductible. Ever.
2. Buyers agent a CGT cost IF it is incurred specific to a property. Prepaid before contract as a form of fishing trip isn't a CGT cost just as personal travel to shop for a new IP isnt a CGT cost either. If its a BA fee paid before you find a property it not a CGT cost. Too early is before YOU CONTRACT.
3. Seek personal advice.

 

[s0805]

What is your question about date in relation to? CGT is based on the date of the contract not settlement.

Terry, was querying about what date is taken into consideration from the tax perspective that property purchase has happened........

buyers agent fees are not deductible against income, but could be against capital gains tax.

I was referring to interest on buyer agent fees not the fees itself. i.e 5% interest on 10000 given they have been setup as separate split (equity release) and exclusively used for investment purposes only....

as per my earlier point....what happens if buyers agent fees paid in Feb but IP settled in AUG....will interest on buyers fee still deductible...hence i was keen to find out what date is relevant contract exchange date or settlement date to classify that property transaction has occured...

e.g. contract signed on 29th Jun 14 and settled in Aug 14. In this case I can start claiming LMI + Interest on BA fees etc....in 13/14 year rather than next year...

OR

contract signed on 2 July 14 and settled in Aug 14. what happens then for claiming LMI + Interest on BA fees etc (transaction that took place in previous FIN year)....


I gather buyer agent fees get included in cost base when selling as well...

 

[s0805]

Thanks Paul.

Whhaaaaa....
1. Buyers agent NEVER deductible. Ever. Again, I was referring to interest of the BA fees not the fees itself. Apologies for the confusion
2. Buyers agent a CGT cost IF it is incurred specific to a property. Prepaid before contract as a form of fishing trip isn't a CGT cost just as personal travel to shop for a new IP isnt a CGT cost either. If its a BA fee paid before you find a property it not a CGT cost. Too early is before YOU CONTRACT. So basically if you pay BA fees before you signed property contract then it will not be added to cost base but BA fees paid after contract siging are included in cost base. And per point 1. interest on the fees paid to BA before contract was signed can be still deductible cause its used for investment purposes....

 

[Terry_w]

Yes, possibly fees paid too soon wouldn't be deductible.