LOC to Pay Expenses

This may have been covered previously, however, my searches so far have brought up nil. The question/scenario is:

I have an IP with an I/O loan. I set up a LOC for this property only. The limit of the LOC will be 80% the value of the property, minus the loan amount.

If I pay the interest for the I/O loan and all holding costs for the IP (i.e land tax, council rates, repairs, etc) from the LOC, will the interest incurred on the LOC also be deductable at tax time? To further complicate matters, can I pay the interest due on the LOC from the LOC itself, i.e., incur interest on interest, and still make it a tax deduction?

What I am essentially doing is increasing the loan to 80% of the IP's value.

Comments, pros, cons welcome.

Cheers
Jaaws
 
The question of the extent to which the interest capitalized will be an allowable deduction was recently re-visited by the courts in Hart's case.

Apart from looking at the issue of whether split loan facilities were caught by the general anti-avoidance provisions (Part IVA) of the tax legislation, Hart’s case also dealt with the much wider issue of the deductibility of compound interest incurred on borrowings. All the judges in the Full Federal Court were unanimous in their conclusion that compound interest would be an allowable deduction.

The bench in High Court appeal did not deal specifically with this issue, instead choosing to limit the scope of their decision to the application of PartIVA to the arrangement.

Accordingly, if the views expressed in the Full Federal Court are any indication, it seems that the general deductibility of simple/compound interest is not in question, although it would be prudent to consider the application of PartIVA to any arrangement being considered.

Hope this helps.
 
Richard, if I understand you correctly the interest on capitalised interest is an
allowable deduction so long as it is not part of some split loan arrangement whereby
all the income goes to paying off one's PPOR and the interest is capitalised.

Is this statement correct?

andy
 
No, I'm not saying that!

The interest will not be deductible to the extent that there is a Part IVA arrangement. To establish whether this is the case in a particular situation would depend on the particular facts. Split loan arrangements of the type in Hart's case are but one example of a Part IVA arrangment.
 
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