paying for an IP from a joint loan

[coolie21]

I'm confused re my potential tax situation with regard to an IP purchase, as I have been given conflicting views.

My wife and I own our PPOR in joint names. We have a LOC facility secured against this property, currently with nothing drawn down. I want to buy an IP, and as the higher rate taxpayer will buy in my name. I will get a mortgage for 80% LVR in my name, secured against the IP, from a different lender. My plan was to use the LOC from the PPOR to fund the remaining 20% + the buying costs.

Jan Somers says in 'More wealth from residential property' that the ATO are only concerned with the name on the title, which I and others have interpreted to mean that if the LOC is used only for investment and is not contaminated with personal debt then I will be able to claim the interest on the 20% against my tax. My accountant however says: if you intend to borrow money and incur interest , the borrowed money must be in the name of the person buying the asset whether it is property or shares - implying that at best only half of the 20% could be apportioned to my tax.

Has anyone had any experience of this situation? I know I could set up another loan or LOC against the PPOR in my name only with my wife signing as guarantor but this seems possibly overkill (particularly if not necessary) and would incur additional stamp duty etc.

NB Because of the time frame of this purchase any trust structure as an alternative solution is not feasible.

regards

coolie

 

[Rixter]

Coolie, Id be getting a new accountant if I was you.

Its the purpose of the drawings that determines deductability, not where the drawings come from.

Obviously if you're audited you need to be able to demonstrate your deductable interest is not contaminated with non deductable interests. ie separate accounts etc.

Hope this helps.

 

[coolie21]

Coolie, Id be getting a new accountant if I was you.

That's what I was worried about.....

 

[Rixter]

That's what I was worried about.....

Are you sure thats what your accountant was implying - not you miss interpreting him/her?

 

[duncan_m]

if you intend to borrow money and incur interest , the borrowed money must be in the name of the person buying the asset whether it is property or shares - implying that at best only half of the 20% could be apportioned to my tax.

In addition to what Rixter said about the purpose of the borrowings determining the deductability of the interest your understanding that its the name on the title that determines WHO can deduct the interest is 100% correct.. the loan can be in joint names and YOU as a 100% owner of the investment property can claim the interest on the funds drawn down from the LOC to fund the deposit.

 

[coolie21]

Thanks - will take it up again with my accountant on Monday

coolie

 

[mitta]

that the ATO are only concerned with the name on the title, then I will be able to claim the interest on the 20% against my tax. Has anyone had any experience of this situation? .

regards

coolie

coolie,

Just adding to Duncan and Rixter's advice, we have a slight variation to your query, just yesterday I spoke to the ATO about our similar situation. We have a HDT that has myself and a brother as the unitholders, but all of our equity from our investments are in three names and also to help us with serviceability for a new borrowing we have to include a sister on the loan. Ato suggested we setup a Loan agreement stating that we each payback to our sister, the same amount of interest that the bank charges for her portion, one third of the loan. In others words, in the eyes of the Ato she pays nothing but we incur 100% of the loan interest for our tax deductions.

Mark

 

[mitta]

Thanks - will take it up again with my accountant on Monday

coolie

Coolie, our accountant gave us exactly the same advice , but after reading some of the treads on this site that had replies from accountants and then after contacting the Ato to confirm our particular situation, I found our accountants response a little disheartening.