New rules on prepaid interest expense



From: Dodo 800

Is anyone aware of the details for deductibility for prepaid interest for individuals. Apparently the rules changed late last year.

Specifically, can an individual prepay the interest on a negatively geared property late in a financial financial year, and claim the full interest deduction in the same financial year(along with the total monthly interest charged earlier)?

If this were to gain a tax advantage, would the ATO spoil the fun?
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Reply: 1
From: Glenn Mott

Hi Sue,

This is a question I have posted on before and have received the answer that yes, you can claim for a whole year's interest paid in advance if paid late in the financial year.

However, I am not sure that if you bought a property in May and then in June paid 12 months interest in advance whether you could claim the whole amount or:

amount paid X days owned

Please seek your own accountant's advice before paying this amount as your cashflow for the next 12 months could be affected dramatically and the opportunity cost be huge if you take someone's verbal advice and it be wrong!!


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Reply: 2
From: Dale Gatherum-Goss


I am aware of the changes late last year with regard to claiming prepaid deductions.

Prepaid interest is allowable as a tax deduction and is legitimately used to reduce tax quite often.

To avoid problems with the tax office, the prepaid interest should be at a lower rate than normal just so that you can argue that you received a commercial advantage from doing so.

Mind you, in the 2001 income tax returns, the tax office asked a question about prepaid interest which often signals that they are collecting information for now with a view to attacking the concepts in the future.

So, at the moment, yes you can deduct prepaid interest as a tax deduction and be well within the laws, BUT, the new rules will mean that a prepayment is apportioned over the time involved and claimed partly in the year it is made, and, partly in the following year.

More to follow, I fear . . .

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