LMI Tax query

I have just refinanced to open a line of credit which is to be exclusively used for property investment. We had to leverage to 90% to get a satisfactory amount, thus incurring LMI. I mistakenly believed the LMI would all be placed on the LOC (tax deductible over 5 years as an investment expense) but a larger portion has been attached to our variable and fixed portions of our refinanced home mortgage.

Do any experts know if the ATO will accept that these 2 portions of LMI on our PPOR are purely as a result of investment activity and hence tax deductible? Or is this just the price of doing business in our situation? There was no reason to re-finance other than for investment purposes and we can prove that to the ATO if necessary.

Thanks in advance.
 
Do you have an investment property at the moment?

Just wondering how this relates as an expense incurred in gaining an assessable income. _possibly not deductible at all if incurred too soon.
 
Currently looking for investment property. Needed to re-finance and setup Line Of Credit so that a deposit was available. Re-finance is processing now. Will be done in a few weeks time.
 
I would expect that the LMI is apportioned in same % as the refinance + new loan (deductible.) unless you obtain a private ruling which considers your prersonal circumstances that is favourable.

Example :
- Existing loan over MR $400K
- New Loan for investing $100K
LMI deductible would be 1/5th deductible.

This is a normal apportionement issue and you cant choose to consider that all of the LMI relates to the new sum even though it may trigger the LMI requirement as the LVR now exceeds say 80%. Same principles apply as to "use of the borrowed funds" not where the security is.

The "too early" principle isnt as much of an issue as Terry considers. Loan fees are ALWAYS incurred prior to the disbursement of the attached borrowing !! ATO accepts that if the interest is deductible then same % applies to the borrowing costs. Over 5 years :)
 
So even if the purpose of the refi / LMI cash out was for investment, only 1/5th is deductible? Can't use the 'but for' test?
 
I would expect that the LMI is apportioned in same % as the refinance + new loan (deductible.) unless you obtain a private ruling which considers your prersonal circumstances that is favourable.

Example :
- Existing loan over MR $400K
- New Loan for investing $100K
LMI deductible would be 1/5th deductible.

This is a normal apportionement issue and you cant choose to consider that all of the LMI relates to the new sum even though it may trigger the LMI requirement as the LVR now exceeds say 80%. Same principles apply as to "use of the borrowed funds" not where the security is.

The "too early" principle isnt as much of an issue as Terry considers. Loan fees are ALWAYS incurred prior to the disbursement of the attached borrowing !! ATO accepts that if the interest is deductible then same % applies to the borrowing costs. Over 5 years :)

Paul, what about the case where finding the new property drags on a bit - say 1 year after the actual refinance?
 
Terry a fair question. The "fees" relate to that facility and also its subsequent USE. This occurs with someone like a property developer as an example in almost every instance. Prior to a single bit of dirt being shoveled or a fence around the site a developer would get loan approval and fpay fees etc. Typical fees incl approval, legals, security. Other fees directly related to actual loan include draw-down fees etc. Loan is drawn down over time maybe after some extended period of time - After own cash reserves are depleted. Six months, a year. Sure. Thats deductible...The fees not preliminary as they relate to the expectation to draw for the income earning purposes.

However there could be occasions when a non-deductible occurs. Lets say Davo gets approval for a $200K facility LOC lets say over main residence. Intending to buy share (CBA) investments for income + gains. Six months later he hasnt done that and then decides to invest and buys a property. I would consider that six months of the 60month apportionment of fees MAY be private and non-deductible. What about if Davo waits a year and then buys shares ?? Hmmm...Maybe also non-deductible. Maybe deductible.

How can a taxpayer get certainty ? Love that word in tax. I was once told by Ptr I worked for "never" to use it. Well I dont agree with that view and confine it for rare use..but without a private ruling there can be no certainty. Thats our tax system. What are the facts ? If Davo had invested in shares for six months , repaid the LOC then redrawn for the property then these facts would indicate a 100% deductible (for the 6/60th of fees) but split over two purposes.

A : If "finding" the IP is the issue in your example I would consider it non-deductible for that period in absence of a ruling.
 
Update to prev post....

There is a need with all loans to review the deductible use. In the example of the prop developer lets say he draws $35K of loan proceeds to make a paymnet to buy a motorbike. That is non-deductible. Thus that % of fees non-deductible too.
 
Back
Top