LOC repayment - Tax confused

[ZachAnSel]

Hi guys,

I have this questions in mind, let say I have LOC setup for $100k and I only use $80K.

In terms of the tax, can I leave LOC keep growing with the interest charges per month? Eg. Jan $80k, feb $81k, March $82k
Or prefer to setup direct debit to make sure/keep the amount as $80k?
I'm affraid ATO will questioning the interest after interest in LOC.

Let me know which one u préfer, thanks

 

[Aaron_C]

Do you have any non-deductible debt?

 

[ZachAnSel]

Do you have any non-deductible debt?

Yes Aaron, I do have.. Sorry bit confuse relate LOC and non-deduct debt. Can u elaborate please?

 

[Aaron_C]

As in do you still owe money on your PPOR that is NOT tax deductible?

 

[ZachAnSel]

As in do you still owe money on your PPOR that is NOT tax deductible?

Sorry mate, my brain totally block..

Real case scenario
I have PPOR $500k, loan $300k. LOC at 80% is $100k.
Ignore offset for while..

Then i have the LOC, which I only use for 80k.

I use that for buying IP, mean while the rent money is go to my PPOR offset account. Can I leave LOC compounding interest after interest monthly?

 

[Terry_w]

Interest on interest is deductible if the underlying interest would be deductible.

But if you are doing this for a tax advantage then the ATO could apply Part IVA and deny the deduction. Best to seek a private ruling.

 

[s0805]

It's hard to argue as this arrangement looks to have dominant purpose for tax benefit...confirm with your accountant..

 

[Jolly123]

Hi Zach,
I'm about to embark on the same experience as yours. I thought LOC is like a loan that will need to have repayment scheduled against it. How could the interest compounded? I'm a newbie on this matter, I could be the wrong.

 

[Terry_w]

Hi Zach,
I'm about to embark on the same experience as yours. I thought LOC is like a loan that will need to have repayment scheduled against it. How could the interest compounded? I'm a newbie on this matter, I could be the wrong.

Depends on the product and the lender. Some LOCs do no require any payment at all until you hit the limit. Others require regular monthly payments of interest.

 

[ZachAnSel]

Depends on the product and the lender. Some LOCs do no require any payment at all until you hit the limit. Others require regular monthly payments of interest.

That's where the issue begin Terry, if/as behaviour differrent than IO loan..
I have friend having ATO issue with compound interest, meanwhile my accountant advise me to do so. This is really grey area even we do the same step

Perhaps the solutions is to pay only the monthly interest each month, to make sure maximum deductability of LOC..

 

[Terry_w]

That's where the issue begin Terry, if/as behaviour differrent than IO loan..
I have friend having ATO issue with compound interest, meanwhile my accountant advise me to do so. This is really grey area even we do the same step

Perhaps the solutions is to pay only the monthly interest each month, to make sure maximum deductability of LOC..

I don't think capitalising interest is a grey area. ATO publications clearly say interest on capitalised portion is deductible if the underlying interest is deductible.

ATO also says they can deny the deduction where someone is doing so with a dominant purpose of 'paying off the home loan sooner' type scheme