mixing personal $ with LOC: will ATO disallow deduction?

[nomadic]

Hello everyone, i'm another lurker who's come out of the closet to register

I've spent many hours reading old posts to educate myself but have not been able to find an answer to this question, so here goes my first post

If i have a LOC where my rent ($2,000 per month) goes into and my IP loan repayment ($1,200 per month) also comes out of, i understand that the interest on this LOC is tax deductable (because it's being used for income producing purposes).

What if i also have a certain amount ($200) each fortnight transferred into my ATM account which i use for personal daily expenses? Is the interest on this LOC still 100% tax deductable?

I'm guessing that because my rent is in excess of my ATM transfers, that it shouldn't be a problem?

Is this an ok way to structure things, or should i get my property manager to deposit the $200 directly into my ATM so as not to muddy the waters?

Thanks for any advice that can be made,

Dan

 

[Twitch]

What if i also have a certain amount ($200) each fortnight transferred into my ATM account which i use for personal daily expenses?

uh oh, it isn't coming out if the LOC is it? If so that is not so great, and interest on those $200 xfrs will definitely not be deductable. Maybe you can also clarify why you think the original LOC is tax deductable.

 

[nomadic]

uh oh, it isn't coming out if the LOC is it?

Yes it is

And i've been doing this for about 2-3 years now and always been claiming all of the interest on the LOC

Until reading some old posts, i've always thought that it would be ok because it's only a small part of my total rent.

Maybe i should be getting the property manager to transfer the $200 directly into my ATM and have the balance put into the LOC?

 

[Twitch]

Maybe i should be getting the property manager to transfer the $200 directly into my ATM and have the balance put into the LOC?

Yes that is the way to do it.

The issue is that once the funds go into the LOC it is treated as a pay down of the principle, any xfr out is treated as a new draw down and must must be for investment purposes if it is to be tax deductable. There is no such thing as parking personal funds temporarily in an investment LOC.

I think you need to have a heart to heart with your accountant to see how to untangle the situation you're in. Don't feel too bad, many have done something similiar, I did a few years ago much to my accountants frustration.

 

[Rolf Latham]

Hiya Nomad

Welcome

You likley cant do much about the past.............but you can fix it NOW ?

Simply refinance into an Interest only product with a 100 % offset acct, park all cash in the offset, claim all interest on the loan.

ta

rolf

 

[Mry]

If i have a LOC where my rent ($2,000 per month) goes into and my IP loan repayment ($1,200 per month) also comes out of, i understand that the interest on this LOC is tax deductable (because it's being used for income producing purposes).

OK, stop right there. It sounds as if you have 2 loans there, your basic run of the mill loan with a set repayment, and a Line of Credit.

Here is the important question - Was each loan devoted to the purchase of this IP? (For example, you have a $400,000 house and you get two loans of $200,000 each to purchase it?) Or where each of them for different properties? Once you answer that, we can comment further.

A loan does not become deductible merely because rent goes into it and repayments come out. The original purpose for the loan must be considered.

 

[nomadic]

Thanks for the advice guys

mdk92 - i appreciate your comments as i didn't realise each withdrawal from a LOC is considered a new draw down and that there's no such thing as parking personal funds temporarily in an investment LOC

Rolf - i'm a bit confused about your advice. Yes i'd like to fix the situation but i'm unsure what you mean about "refinancing into an interest only product with a 100% offset acct, park all cash in the offset, claim all interest on the loan".

My LOC is a Viridian with $20k limit. Are you saying that i should open an offset account with C'wealth bank and link it to the LOC... and then get the rent money deposited into the offset rather than the LOC? But what about the loan repayments: if i continue to get the repayments deducted from the LOC, i will go through the lot within a year (my interest bill last year was $24,300)

Mry - No, each loan was not devoted to the purchase of this IP. Of the 2 loans with C'wealth, one is the I.O. home loan and the other is the $20k LOC. The home loan was a refinance for my I.P. and the $20k was set up to make my loan repayments. I guess you could say the original intention of the LOC was for my loan repayments to come out of, but i also did buy some shares with it.

Thanks for any more advice that can be offered

 

[Mry]

Mry - No, each loan was not devoted to the purchase of this IP. Of the 2 loans with C'wealth, one is the I.O. home loan and the other is the $20k LOC. The home loan was a refinance for my I.P. and the $20k was set up to make my loan repayments. I guess you could say the original intention of the LOC was for my loan repayments to come out of, but i also did buy some shares with it.

My goodness, this is quite convoluted. My poor brain is still trying to recover from the LOC guy I had in today with 2 rental properties and several parcels of different shares all financed from one line of credit which he also used to pull money out from ATMs every few days, a boat and to pay of his private credit card every month. What a horror.

Anyway, I assume that I.O. is the rental property loan. I also assume that the refinance did not take into consideration the debt of anything other than the loan used to purchase the rental property (for example you didn't pay off a credit card, your place of residence or a debt for any other matter when the property loan was refinanced). If my assumptions are correct, the IP loan is deductible.

As for the line of credit, your evidence suggests that it is not deductible for the rental property as it was not used in the purchase of it, but merely as an account for managing your finances. The fact that rent is received and repayments are made out of it does not make it deductible. To the extent that it was used to purchase shares, that portion will be deductible but to be honest it wasn't a very good place for you to buy the shares from since it appears to be a rather active account.

Why? It will be a nightmare for you to track the amount deductible for the shares. Everytime you make a withdrawal, you have to recalculate the deductible % of the loan using this formula:

Balance prior to withdrawal x deductible % of loan / Balance after withdrawal.

eg 40,000 x 20% / 40,200 = 19.90%

This must be done for every single withdrawal for non share matters (excluding bank fees). ATM withdrawals, credit card payments, milkman, etc. That should make the spreadsheet from hell.

Theres probably a lot more I could say or add but I recommend you take all those bank statements down to an accountant and discuss the matter with them at tax time.

 

[Sunfish]

This subject comes up regularly and I always shake my head.

For decades my personal/business/investment accounts have been hopelessly intertwined. I pay all bills from my cheque a/c which has an overdreft facility attached. These bills include my lady's credit card every month. I would be happy to buy a car or boat this way. When you do your tax they are simply "drawings". The ATO expects you to draw money from your enterprise or why would you be doing it? Besides if you aren't drawing enough to live on you must be cheating!!!! (This has always been a strong reason for me to run these bills through my accounts..... the ATO can see I am paying myself)

I have NEVER apportioned bank charges, interest and overdraft charges.

I also have a LOC into which I transfer excess funds in my bank a/c, regardless of whether these were private or taxable incomings. To buy a car I would simply transfer the funds out of this a/c into my bank and write a cheque. My wife's salary also goes into this a/c.

Again I have NEVER apportioned interest or charges. I have claimed the lot.

My credit cards are used mainly for biz but not exclusively and again ALL costs are claimed against tax.

This has evolved over four decades and nobody has a problem with it, either ATO or my accountant.

I just wouldn't try with -ve geared investments

It works for me

Thommo

 

[Twitch]

True, but I could go today, buy myself a Rolex as "an investment" and claim it on my tax, and get a refund. Thats a beauty/danger of our self assessment tax system.

Of course, come audit time .... .... .... $$$$

 

[Sunfish]

True, but I could go today, buy myself a Rolex as "an investment" and claim it on my tax, and get a refund. Thats a beauty/danger of our self assessment tax system.

Of course, come audit time .... .... .... $$$$

Why, if you want a Rolex personally, couldn't you pay for it out of the biz and simply call it drawings? Calling it an "investment" is probably fraud but calling it "drawings" is honest and the money is taxable.

You enter into business to make a profit and you are expected to draw down on that profit to fund your lifestyle, even if the enterprise still has outstanding debts! As long as you pay appropriate tax on your lifestyle, it should be OK. IMHO, of course.

 

[coastymike]

If you are operating through a partnership then it will be treated as drawings and the partners are then assessed on this as taxable income.

Similarly if you purchased the Rolex through the business your accountant will want to treat it as salaries & wages and so there will be no tax benefit from purchasing it through a company.

If you are operating through a company and treat is as an expense where are you going to put it to ? If you put it to directors loan then you have a Division 7A issue. If you put it to another account and the accountant reviews it because of abnormal expenditure patterns then it will be detected at the preparation of your Income Tax Return and you will need to reclassify it.

Technically you could purchase every single private transaction and code it to business accounts. However this is tax evasion..plan and simple...in the case of an audit you would suffer severe penalties, possibly even a gaol term. If your accountant detected it and you refused to reclassify the transaction the accountant, if they were a professional, would indicate to you that if you chose to continue with tax evasion then they could no longer be your accountant. The professional indemnity issues are not worth it. No matter how much you pay them.

If you want a Rolex then pay for it from your personal account.

Thommo I think your advice re purchasing all transaction (private and business) on credit cards and then claiming the entire interest expense is incorrect. I personally know of one individual - not a client, who did that very thing. When it was time for an ATO audit they reviewed the interest account (it was huge because they put everything on credit cards holidays, etc.) and claimed it as a business expense. They got hit with penalties (75%), interest and ended up with an enormous tax bill. What you are doing is incorrect and although your accountant may not have a problem with it (they should) the ATO certainly does. Just put a private ruling into the ATO with those facts and ask if the interest is deductible. I dont think they will say its ok. Because it's not. The purpose of the borrowings (credit card) were used for private purposes and therefore not deductible. The method for determining interest deductibility has been correctly outlined by Mry and is in fact discussed in a Taxation Ruling. I think you should review your position.

 

[Sunfish]

If you are operating through a partnership then it will be treated as drawings and the partners are then assessed on this as taxable income.

Similarly if you purchased the Rolex through the business your accountant will want to treat it as salaries & wages and so there will be no tax benefit from purchasing it through a company.

If you are operating through a company and treat is as an expense where are you going to put it to ? If you put it to directors loan then you have a Division 7A issue. If you put it to another account and the accountant reviews it because of abnormal expenditure patterns then it will be detected at the preparation of your Income Tax Return and you will need to reclassify it.

Technically you could purchase every single private transaction and code it to business accounts. However this is tax evasion..plan and simple...in the case of an audit you would suffer severe penalties, possibly even a gaol term. If your accountant detected it and you refused to reclassify the transaction the accountant, if they were a professional, would indicate to you that if you chose to continue with tax evasion then they could no longer be your accountant. The professional indemnity issues are not worth it. No matter how much you pay them.

If you want a Rolex then pay for it from your personal account.

Gee! I didn't know we were talking about tax on the spend. I thought we were discussing deductability of interest on the debt AFTER the spend.

Nothing I suggested could be considered tax evasion, it fact I spoke of paying appropriate tax. (sigh!)

 

[Corsa]

Hi Thommo

You are not being serious are you?

Expenditure on non-investment related items are not tax deductible. Period.

Anyone claiming personal items that do not have a necessary connection with earning income are simply avoiding tax which is illegal.

I am all for minimising tax but avoiding tax is just wrong.

Nomadic: the responses so far give you a good idea how to deal with your specific situation, but talking to an accountant to work out how to structure things and taking on boards Rolf's advice about having an offset account against an Interest only loan, should get you back on track again.

Good luck

Best Wishes

Corsa

 

[Corsa]

Gee! I didn't know we were talking about tax on the spend. I thought we were discussing deductability of interest on the debt AFTER the spend.

Nothing I suggested could be considered tax evasion, it fact I spoke of paying appropriate tax. (sigh!)

Thommo, whilst I posted my post, Mike and yourself have also reposted.

Thommo, if you thought that we were discussing deductibility of interest on the debt after the spend, this is not clear from your posts.


Your comment "I have NEVER apportioned bank charges, interest and overdraft charges....I have claimed the lot." does imply that you claim as a deduction both personal and investment expenditure.

If that's not the case then that is fine, but we can only go on the posts you are making....

 

[Sunfish]

Hi Thommo

You are not being serious are you?

Expenditure on non-investment related items are not tax deductible. Period.

Anyone claiming personal items that do not have a necessary connection with earning income are simply avoiding tax which is illegal.


Corsa

Corsa, Please indicate where I advocated calling "Expenditure on non-investment related items" a business expense.

How can I state it more clearly than I did, that I have for near 40yrs paid private expenses out of my business (partnership) accounts while it similtaneously has debts which are acrueing interest WITHOUT apportioning any of the interest as "private". My accounts are always signed of by a partner in PriceWaterhouseCoopers.

I thought that was what Nomadic was asking about.

If you guys can't read, that's not my concern.
If I can't write good then I will have to try harder.

Over and out!!!!!

 

[coastymike]

Thommo,

So you are claiming all the interest on this account despite the purpose of the borrowing being for both private and business purposes ? It may be that the partner at PwC is not aware that you are using this account for both private and business purposes. If you are then a portion of the interest is NOT deductible.

I was referring first to the point being raised by the individual trying to claim non business expenditure (i.e. a rolex) as business expenditure. Secondly I was then referring to your post when you said that you claim ALL interest on your credit card despite the fact you use it for both business and private purchases.

I would refer you to Ruling TR 2000/2 Income tax: deductibility of interest on moneys drawn down under line of credit facilities and redraw facilities, provides the Commissioner’s view on the taxation treatment of loan interest expenses incurred in your circumstances.

No need to get defensive. If we have misread what you are doing then that is find but even from your subsequent post I get the impression you are claiming ALL interest expenses.

 

[Corsa]

Corsa, Please indicate where I advocated calling "Expenditure on non-investment related items" a business expense.

How can I state it more clearly than I did, that I have for near 40yrs paid private expenses out of my business (partnership) accounts while it similtaneously has debts which are acrueing interest WITHOUT apportioning any of the interest as "private". My accounts are always signed of by a partner in PriceWaterhouseCoopers.

Hi Thommo,

Where I believe you advocated calling "expenditure on non-investment related items a taxable deduction" is where you say "I have NEVER apportioned bank charges, interest and overdraft charges....I have claimed the lot." Even when you point out "These bills include my lady's credit card every month. I would be happy to buy a car or boat this way. When you do your tax they are simply "drawings"..

And on a later post you mention"Why, if you want a Rolex personally, couldn't you pay for it out of the biz and simply call it drawings? Calling it an "investment" is probably fraud but calling it "drawings" is honest and the money is taxable."

So this leads me to believe that you consider expenditure on non-investment related items (ie boat, car, rolex, wife's shopping), categorise it drawings and consider it tax deductible expenditure.

What are you exactly saying here? If you are saying that you agree that non investment related exenditure is not deductible, then we do not have a problem here, and I hope I haven't confused things to much by seeking a clarification.

That is what Nomadics question effectively is "If I use a LOC for personal and investment, is the whole amount of interest deductible?" Which is the answer is it is not. The interest associated with the investment is deductible whereas interest associated with personal is not, and each line item will need to be apportioned.

Does this assist you understand where I am coming from with my questions?

You must be prepared to accept some critique if you post a response that appears as if you claim as a tax deduction regardless of whether it is personal or investment.

The other day, Asy corrected Kristine on a post about land tax or something and Kristine took it very well.

Btw: What the hell is the "over and out" comment about?


Best Wishes

Corsa

 

[Mry]

Thommo, you would be able to claim interest deductions for the partnership for your drawings, but only to the extent that you make those drawings on your taxable profit distributions only, and anything in excess of that would breach the Roberts and Smith principle. That would require permanent apportionment.

Partners are not taxed on drawings, only on their share of the profit of the partnership. Drawings are not tax deductible and can be used for anything really.

However I would not claim any of the interest on your line of credit. It is a personal account from what I read, and I would assume that none of the expenditure in that account relates to the business or any other income producing asset.

Be very careful. The big accounting firms may be good at what they do, but they aren't immune to mistakes. I would be calling them up right now, explaining that you are spending private funds through your LOC and how they are claiming it, and ensuring that they check the drawings out of your partnership to ensure compliance with the Roberts and Smith case. I would also ask if they are claiming expenses you are using for personal purposes as tax deductions. And I would get the response in writing.

As for having it done for 40 years, a have a nice auditor joke that describes my feelings on that -
Q Why did the auditor cross the road?
A Because he looked in the file and that's what they did last year.

 

[geoffw]

have a nice auditor joke that describes my feelings on that -
Q Why did the auditor cross the road?
A Because he looked in the file and that's what they did last year.

And my feelings on auditors...

What's the definition of an auditor?
A person who goes in after the battle is over to bayonet the wounded.