mixing personal $ with LOC: will ATO disallow deduction?
- Thread starter nomadic
- Start date
I thought auditors were good friends with parking inspectors 
I thought that was what I was saying.Mry said:
Partner's salary aka "drawings" is not only a legitimate expense it is a mandatory one. If you are not drawing from your enterprise, How are you living? Undeclared income?
Back to Nomadic's Q,
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?
Why can't the $200/m simply be "proprietor's salary"? That way the total debt remains 100% business.
It's OK about my accountant too. I don't need to make a phone call but if I needed clarification on these matters I would ask her, provided she isn't asleep when I go to bed. But then she may not know what she is talking about: She has only been in the industry over 40yrs afterall. And don't be so condescending about the big accounting firms. Your "damned by faint praise" post smacked of professional jealousy. The senior partner of Price Waterhouse has been in town for 25 years and earned a reputation as the best, if you can afford him.
This time it is "over and out". It would be impossible for me to state this simple fact that I have been doing it for decades any simpler. Besides why should I cop ****? I was just saying how I do it.
I thought I would offer some advice on your situation Thommo, as I do when I see something that believe is wrong or requires assistance, but if you don't want it, thats fine. But I would have expected a little more respect in a professional forum. I stand by my words. Lets leave it at that.
Thommo,
Doing something for decades doesn't make it legal.
I remember one of the world's largest accounting firms disappearing recently due to poor accounting practices.
I cannot comment on whether Mry is correct or not - but if I was in your shoes I'd be looking for a second opinion just in case.
The couple of hundred it costs is a worthwhile risk management investment.
Nomadic,
Keep personal and investment monies separate. There are too many risks in doing it any other way.
Cheers,
Aceyducey
Doing something for decades doesn't make it legal.
I remember one of the world's largest accounting firms disappearing recently due to poor accounting practices.
I cannot comment on whether Mry is correct or not - but if I was in your shoes I'd be looking for a second opinion just in case.
The couple of hundred it costs is a worthwhile risk management investment.
Nomadic,
Keep personal and investment monies separate. There are too many risks in doing it any other way.
Cheers,
Aceyducey
Hi nomadic,nomadic said: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
I think that your rent should not be deposited into your LOC at all.
Have a look at an example in the attached spreadsheet.
ScenarioB would give you more flexibility. Of course there other possible options on how to structure your loan/s.
Regards
A95
Thommo said:
You are mixing all these issues up, no-one is talking about undeclared income, we are talking about expenditure incurred in an income tax year and discussing the tax deductibility of certain expenditures types.
Thommo said:
Thommo, I was trained in the Big 4 (then 6), starting with Coopers & Lybrand. Coopers merged with Pricewaterhouse to become PricewaterhouseCoopers and the group that I worked for was bought out by IBM. I have collectively over 8 years experience working in these global accounting environments and I have attained status as a Chartered Accountant.
At this point in time, my view is that your explanations are incorrect.
I think you need to review your understanding of how this process works. I am almost 99% confident that PwC have got your accounts correct and believe you to be big fish as a private client with PwC. However in this instance, your ability to explain this concept to Nomadic has been misleading which is why I have pulled you up for clarification.
Thommo, I have a very healthy respect for you from your previous posts on the forum. If I was saying something incorrect I would hope that someone would clarify the situation for me so that I could ensure that I was reflecting a view that was both true and accurate. I would have hoped that you would be able to do the same in this instance.
I hope that in all this, Nomadic's questions has been answered and that this "healthy" debate has worked through all the issues that anyone might have.
thommo said:
Just because you have been doing it for decades Thommo does not make it right. Many people are under the false assumption that:
a) many private expenditures are tax deductible
b) LOC interest is 100% deductible
c) They can extract money out of a loan to pay for personal items and that loan continues to be deductible for them
I am not surprised that this question continues to come up and that it continues to generate debate. It is part of the education process.
Best Wishes
Corsa
Corsa said:
Thanks Corsa, i have taken all the advice on board and it looks like the best way to resolve this is to:
1) cancel the transfers from the LOC to the ATM account and,
2) get my property manager to transfer the $200 directly into my ATM account.
But i'm still unsure about Rolf's advice as i wrote previously, i.e.
My LOC is a Viridian with $20k limit and last years interest bill was about $24,300. If i open an offset account with the same bank (linked to the LOC) and then get the rent money deposited into the offset (instead of the LOC), my loan repayments will chew through my LOC limit.
However i understand the concept as i have another St George IO loan where my repayments are coming out of a LOC (also with St George). It's pretty much the same setup as the C'wealth bank except i don't have any personal drawings on this LOC.
Thommo said:
I never thought that i could draw the $200 as a "proprietor's salary", but thought that i could do it because the rent was in excess of this amount and it would be ok... but now that you mention it, perhaps i could argue that it's my "management" fee for dealing with the property manager
A95 said:
Thanks for that A95. I'm not too good with spreadsheets but do notice that i'd be better off with scenario B ($7,000) because i can claim much more interest as a deduction than scenario A (-$6093.26) - almost $14,000 more!
But i still think that my setup is ok (except for the $200 personal drawings).
Not sure how others do it? Maybe get the rent money paid directly into the IP loan? But then how do you access funds to pay rates, body corporate, repairs/maintenance etc?
What i've been doing is to pay it by credit card and then pay the c/c from the LOC. This c/c is solely devoted to IP maintenance/repairs/improvements and i do not buy ANY personal items on it.
Thank you for your prayers and advice re my accountants
But there are others, more worthy of your compassion.
Many people are under the false assumption that:
a) many private expenditures are tax deductible
I and my accountant know perfectly well what "tax deductable items" are. What made you believe we don't?
b) LOC interest is 100% deductible
It is if used correctly. Mine is, and always has been, used to fund my business and later, my investments. It has also been used, on occasions, to fund my salary via "drawings"
c) They can extract money out of a loan to pay for personal items and that loan continues to be deductible for them
Can you clarify the difference between "partners' salary" and "Personal items". I don't know if it exists.
I reckon the free advice I (personally) recieved on this thread to be worth about what I paid for it. I will return the favour, if I may, and give a little free advice myself.
Don't jump to conclusions such as assuming the advice I recieve is NOT from full time, very experienced, tax professionals. Certain comments on this subject were ill-advised and professionally rude. At least I took offence at them, on my wife's behalf.
Thommo
But there are others, more worthy of your compassion.
Many people are under the false assumption that:
a) many private expenditures are tax deductible
I and my accountant know perfectly well what "tax deductable items" are. What made you believe we don't?
b) LOC interest is 100% deductible
It is if used correctly. Mine is, and always has been, used to fund my business and later, my investments. It has also been used, on occasions, to fund my salary via "drawings"
c) They can extract money out of a loan to pay for personal items and that loan continues to be deductible for them
Can you clarify the difference between "partners' salary" and "Personal items". I don't know if it exists.
I reckon the free advice I (personally) recieved on this thread to be worth about what I paid for it. I will return the favour, if I may, and give a little free advice myself.
Don't jump to conclusions such as assuming the advice I recieve is NOT from full time, very experienced, tax professionals. Certain comments on this subject were ill-advised and professionally rude. At least I took offence at them, on my wife's behalf.
Thommo
nomadic said:
Because the loan repayment in of itself is not deductible and would be an "interest on interest" claim as well. The loan repayment is a financial obligation you incurred to acquire the IP. The actual deduction for the loan is the interest incurred on the IP loan, which takes place in the IP loan itself.
If you could get a deduction in the LOC on the interest for the repayments being made from the LOC to the IP loan, you would be claiming interest on a "financial obligation" for a loan which is there to pay off the house, not on the house or on an expense, which breaks the necessary nexus between the income producing asset and the outgoing.
Taking the principle to an extreme, lets say you bought a house for $400,000, you have a P & I loan of $400,000 and a line of credit, currently with a balance of $0 but a limit of $1 million with no requirement to repay it. Now, over the life of the $400,000 loan, you repay $525,000 to it (in principal and interest) from the LOC. If the repayments created a balance that was deductible in the LOC, you would have created a $525,000 deductible loan (ignoring the "interest on interest" within the LOC itself). If you converted that to a P & I loan and repaid that $525,000 over another 20 years, you would now have a deductible loan of say $675,000. On a $400,000 house.
Note that if you refinanced the loan, that would be transferring the capital amount of the loan to another one. That capital amount doesn't transfer when you just make normal loan repayments.
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An exlanation and a correction.
Over breakfast my wife reminded me that our LOC was set up before the Hearts case and therefore is an unreliable example.
The correction is that I suggested to Nomadic that he could draw off profits as a salary. This is incorrect because it needs to be a business (I assume she meant "trading") to allow this. Investments don't have the option.
So with an old LOC and a trading business I have the flexability to continue doing as I do. I will cease and desist from using my situation as an example to others immediately. I was trying to promote the concept of keeping it simple, (I'm a big believer).
Thommo
Over breakfast my wife reminded me that our LOC was set up before the Hearts case and therefore is an unreliable example.
The correction is that I suggested to Nomadic that he could draw off profits as a salary. This is incorrect because it needs to be a business (I assume she meant "trading") to allow this. Investments don't have the option.
So with an old LOC and a trading business I have the flexability to continue doing as I do. I will cease and desist from using my situation as an example to others immediately. I was trying to promote the concept of keeping it simple, (I'm a big believer).
Thommo
Thommo,
Thanks for your replies. I think it is great when we can all have healthly debates and keep learning from each other. I think all of us, both the accountants and non accountants, enjoy discussing issues on this forum. Even as accountants we can be wrong and i'll be the first to admit there have been times when I have thought that something would be allowed and when clarifying the situation for a client found out my first thoughts were wrong. But I think it was Albert Einstein who once said an expert is just someone who has made a shitload of mistakes and learnt from each one of them.
I don't think anyone was personally attacking you, your wife or your accountant. We were just trying to give our thoughts on the matter. I think we all would appreciate it (i know I would) if you also show some respect as your posts did indicate a fair amount of tension and anger and were quite condescending in some parts. We are all here to share ideas and concepts and hopefully in a manner where we can all learn together.
As to the value of the advice here for me as professional it has been invaluable. Concepts have been raised here that I have questioned and have had to further investigate. As a professional I use this forum to find out what issues are impacting on people and trying to ensure I am up to date in these areas to assist my clients. IN that respect I have found it very worthwhile.
Thanks for your replies. I think it is great when we can all have healthly debates and keep learning from each other. I think all of us, both the accountants and non accountants, enjoy discussing issues on this forum. Even as accountants we can be wrong and i'll be the first to admit there have been times when I have thought that something would be allowed and when clarifying the situation for a client found out my first thoughts were wrong. But I think it was Albert Einstein who once said an expert is just someone who has made a shitload of mistakes and learnt from each one of them.
I don't think anyone was personally attacking you, your wife or your accountant. We were just trying to give our thoughts on the matter. I think we all would appreciate it (i know I would) if you also show some respect as your posts did indicate a fair amount of tension and anger and were quite condescending in some parts. We are all here to share ideas and concepts and hopefully in a manner where we can all learn together.
As to the value of the advice here for me as professional it has been invaluable. Concepts have been raised here that I have questioned and have had to further investigate. As a professional I use this forum to find out what issues are impacting on people and trying to ensure I am up to date in these areas to assist my clients. IN that respect I have found it very worthwhile.
While I have a few of you experts on line can I please ask a question. I am one of those who worriers that I am doing things correctly. I think I know the answer but after reading this thread am a little concerned.
I have a LOC that is on my PPOR. I also have a few investment properties whos loans are of course completely separate.
All the rents go into the LOC and all the interest comes out of the LOC. Also any outgoings eg rates etc come out of this LOC. Also my salary goes into this account
I don't claim any interest on this LOC as a taxable deduction. I only claim the interest on each of the loans.
My question is whether it is ok to have the rents and loan interest flowing through the LOC in the first place.
Many thanks
Julie
I have a LOC that is on my PPOR. I also have a few investment properties whos loans are of course completely separate.
All the rents go into the LOC and all the interest comes out of the LOC. Also any outgoings eg rates etc come out of this LOC. Also my salary goes into this account
I don't claim any interest on this LOC as a taxable deduction. I only claim the interest on each of the loans.
My question is whether it is ok to have the rents and loan interest flowing through the LOC in the first place.
Many thanks
Julie
Hi folks,
been following this thread fo awhile and to be honest it is a bit beyond my comprehension, "I am but a simple bloke".
But I have a the same set up as Julie, a loc on my PPOR with all my rental income,plus my wife's and my salaries going into thus reducing my principal and intrest on my PPOR. All out goings for rates, insurance 7 living expences etc come from CC, which is payed from loc account once a month aswell as all the IPs which are all seperate accounts.
This seems to be working as the principal on my PPOR has dropped dramatically since this was set up by my broker in January this year.
Is this setup ok
regards
john
been following this thread fo awhile and to be honest it is a bit beyond my comprehension, "I am but a simple bloke".
But I have a the same set up as Julie, a loc on my PPOR with all my rental income,plus my wife's and my salaries going into thus reducing my principal and intrest on my PPOR. All out goings for rates, insurance 7 living expences etc come from CC, which is payed from loc account once a month aswell as all the IPs which are all seperate accounts.
This seems to be working as the principal on my PPOR has dropped dramatically since this was set up by my broker in January this year.
Is this setup ok
regards
john
I think you may have become worried because you are calling your repayments "loan interest". They are just repayments. The loan interest is incurred within the loans for the IP itself.[/QUOTE]
Thanks Mry I noticed that wording after the post. Yes the money going out of LOC is to pay the loan interest (all IO loans by the by).
Well thanks again for the reply I do worry a bit about stuff like that. It works very well for us and I have everthing flowing nice and smoothly now. It would have been awful if I was breaking some tax law.
Just as an aside on one of the IP loans I borrowed a bit more for private use but when I calculate loan interest at tax time I only calculate the interest for the IP so in other words I don't claim all the interest on that particular IP.
Thanks Mry I noticed that wording after the post. Yes the money going out of LOC is to pay the loan interest (all IO loans by the by).
Well thanks again for the reply I do worry a bit about stuff like that. It works very well for us and I have everthing flowing nice and smoothly now. It would have been awful if I was breaking some tax law.
Just as an aside on one of the IP loans I borrowed a bit more for private use but when I calculate loan interest at tax time I only calculate the interest for the IP so in other words I don't claim all the interest on that particular IP.
Julie,
You might be better off using an offset account than the LOC for in and out goings. You'll find some past discussions on this topic.
Note there are many cases of banks charging too much interest on 'trading' LOCs. I suggest you keep a close eye on this. There are past discussions on this too.
I trust forum search more than I trust my memory or paraphrasing ability
Cheers,
Aceyducey
You might be better off using an offset account than the LOC for in and out goings. You'll find some past discussions on this topic.
Note there are many cases of banks charging too much interest on 'trading' LOCs. I suggest you keep a close eye on this. There are past discussions on this too.
I trust forum search more than I trust my memory or paraphrasing ability
Cheers,
Aceyducey
