"LOC, interest and tax"

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From: Lars Andersson


Hi all,

I recently went to a seminar where they talked about property investments and bank loans. One scenario that was promoted was as follows:

Loan A - A line of credit loan for my PPOR
Loan B - A line of credit loan that has equity in my house as security, this is used exclusively for investment purposes
Loan C - An I/O loan for an IP
Loan D - An I/O loan for an IP
Loan X - etc.

The suggestion was:
- pay all the rental income from the IPs into loan A until it is paid off
- pay the interest on loan B from by drawing money from loan A
- pay the interest on all the IP loans by drawing money from loan B (thereby increasing the loan amount on loan B)

The end result is that loan A is reduced and loan B increases. They claimed that the interest on the full amount of loan B is tax deductible, is this the case?

I read some tax rulings from the ATO (98/22) that suggests otherwise. They claim that they have a large number of clients doing this kind of tax deduction but they cannot refer to any ruling from the ATO!

I contacted my accountant and he said that the setup is "probably OK".

The difference between what is talked about in ruling 98/22 and this setup is that the LOC that grows in size (loan B) is fully serviced, i.e. the interest of the loan is paid so one cannot say that the interest is capitalized.

I am planning to get a personal ruling from the ATO but I need some help from you guys to formulate a reason for why this setup would not be against the tax avoidance section (is it section IVA).

All advice is appreciated.

Cheers,
Lars
 
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Reply: 1
From: Rixter ®


Why not have Loans A&B combined into the 1 LOC and have the other Investment loans as you already describe. works a treat

Happy Investing,
Rixter :)
 
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Reply: 1.1
From: Rolf Latham


Hi Rix

because you will have great fun separating your non tax deductible and tax deductible debt. Can be done, and indeed many do work on the basis that any principal reduction on such a combined loan comes off the PPOR side.

Ta

Rolf
 
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Reply: 2
From: Dale Gatherum-Goss


Hi Lars

>I recently went to a seminar
>where they talked about
>property investments and bank
>loans. One scenario that was
>promoted was as follows:
>
>Loan A - A line of credit loan
>for my PPOR
>Loan B - A line of credit loan
>that has equity in my house as
>security, this is used
>exclusively for investment
>purposes
>Loan C - An I/O loan for an IP
>Loan D - An I/O loan for an IP
>Loan X - etc.
>
>The suggestion was:
>- pay all the rental income
>from the IPs into loan A until
>it is paid off
>- pay the interest on loan B
>from by drawing money from
>loan A
>- pay the interest on all the
>IP loans by drawing money from
>loan B (thereby increasing the
>loan amount on loan B)
>
>The end result is that loan A
>is reduced and loan B
>increases. They claimed that
>the interest on the full
>amount of loan B is tax
>deductible, is this the case?
>
>I read some tax rulings from
>the ATO (98/22) that suggests
>otherwise. They claim that
>they have a large number of
>clients doing this kind of tax
>deduction but they cannot
>refer to any ruling from the
>ATO!
>
>I contacted my accountant and
>he said that the setup is
>"probably OK".
>
>The difference between what is
>talked about in ruling 98/22
>and this setup is that the LOC
>that grows in size (loan B) is
>fully serviced, i.e. the
>interest of the loan is paid
>so one cannot say that the
>interest is capitalized.
>
>I am planning to get a
>personal ruling from the ATO
>but I need some help from you
>guys to formulate a reason for
>why this setup would not be
>against the tax avoidance
>section (is it section IVA).
>
>All advice is appreciated.


You seem very familiar with this issue and as I see it, you have 3 distinct options:

1. trust your judgement and avoid the recent advice
2. accept the recent advice (but do get it in writing) from the people you pay to look after you
3. apply for a private ruling.

Personally, I do not like private rulings because you are then at the mercy of the tax office.

If you pay a professional for advice and they are wrong, you can sue them for any fines or losses as a result of the advice.

Also, please remember that tax law is ever changing - and, often very fine distinctions can make a huge difference - as in your case where you correctly identified a difference between the proposed action and the ruling.

Finally, may I respectfully suggest that you also look at the recent court case: Hart v. Commissioner of Taxation as this surprised the tax office . . .

Good luck either way

Dale
 
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Reply: 2.1
From: Rixter ®


Hi Rolf,
I dont have any problems separating tax deductable debt from non tax deductable debt..the direct debits from the PPOR LOC are the ones going into each Investment loan for the interest payment....they are all itemised on PPOR LOC statement. Why would this be hard?
Happy Investing,
Rixter
 
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Reply: 2.2
From: Lars Andersson


Thanks Dale,

I found the court case: Hart v. Commissioner of Taxation but I am afraid I did not really understand what I read. If anyone has read about the case and could kindly explain to me, if not in Swedish, in plain English what the outcome was.

I understand that the case talked about a specific loan called the Wealthbuilder, is this specific type of loan significant?

Regards,
Lars
 
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Reply: 2.2.1
From: Dale Gatherum-Goss


Hi Lars!

The important thing within that court case was that the judge decided that the interest was tax deductible . . . he then decided that the way that the loan product worked meant that Part iVA applied and so he disallowed the interest.

This is because the interest was capitalised in a way designed to provide a tax benefit only without any other commercial reasons.

In your situation, this would not apply and so the principles from Hart's case work to your advantage.

Does this help?

Have fun

Dale
 
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Reply: 2.1.1
From: Rolf Latham


Hi Rix

So you claim zero interest on the PPOR LOC ?

Makes sense.

Rolf
 
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Reply: 2.2.1.1
From: Lars Andersson


Dale,

What I have problems with is to formulate the commercial reasons.

Lars
 
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Reply: 2.2.1.1.1
From: Dale Gatherum-Goss


Hi Lars

I don't think you will need a commercial reason other than the fact that you are separating your loans for practicality reasons.

Furthermore, the courts have found that your proposal is reasonable and so the interest is tax deductible providing you do not do anything that is solely to gain a tax benefit - which, by your description in the original post, you are not.

Breathe through the pain and be you should be fine.

Cheers

Dale
 
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Reply: 2.2.1.1.1.1
From: Rixter ®


Rolf,
Isnt that called double dipping in the eyes of the ATO ?
Happy Investing,
Rixter
 
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