LOC Interest?

I have a LOC where 95% of the drawn funds are used for investment purposes. A small amount, about 5%, is non-deductible.

I realise it's always best to keep deductible/non-deductible separate but it's a long story and when drawn I thought that 5% amount would be deductible.

Ok.......the 5% non-deductible amount is more of a nuisance than anything having to split interests etc. so last year I said to my accountant I'd just like to repay the 5% amount and clean the LOC up to be totally deductible. Simpler for everyone I would have thought.

I was told I couldn't just separate any repayment to the LOC like that and that any repayment to the LOC would have to be spread proportionally across the deductible and non-deductible component. This wouldn't solve anything for me except make things more messy.

What is the easiest way around tidying up this LOC to be just deductible? I thought surely if I made a statement saying that a particular repayment on the LOC was to 'remove' the outstanding non-deductible amount then this may be sufficient. It's not that I'm trying to avoid tax?



:)
 
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Really ?

I would have thought you can apply the principle repayment to any part of journaled loan that you like ?

Indeed many people with single LOCs for IPs and PPORs do exactly that, any principle reduction is targetted to non dedcutoble part of the debt.

Ta

rolf
 
I think 'we're' right Rolf.

I actually mentioned this to another accountant friend the other day and she couldn't see any reason why I couldn't do this. ??

Just wanted to get some informed opinion before I went back to the accountant and suggested he have another look.

Don't want to tell someone how to do their job if I'm not sure......


:)
 
A colleague mentioned this very thing to me this morning ie no seperation allowed. Apparently there was an article about this in the courier mail on either Saturday or Sunday. Can't find it on there website, I'll have a look at the papers when I get home this evening and see what it says.
ab
 
OK I found the article and it doesn't really apply to repaying those non investment purchases from your LOC, it mentions ruling 93/6 paragraph 17.
I haven't looked at it but I think it probably applies to your first instance where you used the funds for non income producing assets rather than the repaying of the debt.
I'd call the ATO and see if you can get a definative answer.
astroboy.
 
Hi Alan H,
I am in the same position as you and remember reading (can't remember where!) that unless you had sub-accounts set up on your LOC up front to separate the tax-deductible and non tax-deductible draw-downs, then any repayments to the LOC need to be split proportionally across the deductible and non-deductible components. So I believe your accountant is correct unfortunately.

If you do happen to find this is not the case please let us all know! :)
 
Well.........I rang the ATO.........

I thought the answer to this would have been pretty clear BUT apparently not.

Ahhhh..........Dale, how do you do this with the ATO each day? :confused:

The officer examining this had one opinion and her supervisor had another. They agreed to disagree and put me through to their Disputes Section. The Disputes Section suggested that I get a Private Ruling. Paperwork would take 7-8 days......probably get an answer 28 days after that.......maybe........depends.......

Am I trying to set up an elaborate scheme to avoid tax? No. I'm not even going to reduce my tax. I just want to simplify the paperwork.

You've really got to wonder about the complexity of our Tax Laws don't you?



:confused:
 
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I will always remember one piece of advice i was given by the ATO, when I worked for an Accountants office.

Quote: "Never rely on the verbal information we give you, if we make a mistake, YOU pay the price"

But then again even this advice was "Verbal" !! :confused:

:) :) :) :)
 
Hi Alan

Yes, the tax law ensures that Scotland's finest products are never short of supply!!!

I am afraid that your accountant (the original advice) is right and to help you in this regard, I have attached below an ATO ID which also makes reference of current rulings.

The easiest thing to do would be to ask the bank to split the LOC into two accounts and then repay the non income related account.

Dale

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ATO ID 2002/817

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FOI status: may be released
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Status of this decision: Decision Current


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ATO Interpretative Decision

CAUTION: This record of an ATO decision may not include a complete statement of all facts in summarising the application of the relevant provision of the law to complex circumstances. If you rely on this decision and your circumstances are materially the same as those described, and the decision is subsequently found to be incorrect, penalties will not be attracted on the missing tax. However, interest could be payable in any event depending on the circumstances of the case. If the relevant provisions, being those in force at the date of decision, have been amended or rewritten, it will be necessary to have regard to the amended or rewritten law. You may wish to obtain further advice from the ATO or from a professional adviser.

Income tax
Deductibility of» interest under a «line» «of» «credit» facility - mixed purpose loans

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Issue


Is the taxpayer entitled to a deduction under section 8-1 «of» the Income Tax Assessment Act 1997 (ITAA 1997) for loan interest expenses where the original purpose «of» the loan was private, but now has mixed income and non-income producing purposes?

Decision


Yes. A deduction is allowable under section 8-1 «of» the ITAA 1997 to the extent that the loan interest expenses were incurred in earning assessable income.

Facts


The taxpayer took out a conventional loan to finance the purchase «of» their main residence.

The taxpayer later refinanced the loan with a «line» «of» «credit».

The taxpayer's salary was deposited into the account and they drew money out «of» the account for living expenses.

The taxpayer ceased using the property as their main residence and made it available for rent.

The taxpayer received rental income from this property.

Consequently, the loan has mixed income producing and non-income producing purposes.

The taxpayer incurred interest expenses on the «line» «of» «credit».

Reasons for Decision


Section 8-1 «of» the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are «of» a capital, private or domestic nature, or relate to the earning «of» exempt income.

The loan was originally set up to re-finance the loan used to purchase their primary place «of» residence. As such, the interest expenses incurred would not have been deductible under section 8-1 «of» the ITAA 1997. However, from the time the property was tenanted, some portion «of» the interest incurred on the amount outstanding on the property would be an allowable deduction against the income generated.

Taxation Ruling TR 2000/2 stipulates that interest accrued on a «line» «of» «credit» used for mixed purposes needs to be apportioned.

In order to do this, the taxpayer must establish what portion «of» the loan is attributable to the property at the time it becomes income producing. This is achieved by making a notional calculation «of» the «line» «of» «credit» as if it was used for the mixed purpose from its inception.

As such, all repayments made from the date that the «line» «of» «credit» was established until the date the property became income producing must be notionally apportioned in accordance with paragraphs 44-46 «of» TR 2000/2. This will establish the loan balance applicable to the property as at the date it becomes income producing.

The interest deduction can then be calculated for the rental property in accordance with TR 2000/2 and a deduction will be allowable under section 8-1 «of the ITAA 1997.

Date of decision: 1 May 2002

Year of income: Year ended 30 June 2001




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Legislative References:
Income Tax Assessment Act 1997
section 8-1

Related Public Rulings (including Determinations)
Taxation Ruling TR 2000/2

Keywords
Interest expenses
Rental property loan interest expenses

Date of publication: 22 August 2002

ISSN: 1445-5872
 
Well, I guess the good news is that my accountant is good at his job. That may explain why he is cruising around Europe(again) for the next month. :D

Thanks very much for the feedback Dale. The expert opinion and time you give to the Forum is as always, greatly appreciated. :)

* Alan raises a glass of Scotch to Dale :D :D :D
 
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