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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
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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