Paying interest with debt..again

Hi All

I know this topic has been covered pretty extensively in sevreal threads but haven't been able to find a definite conclusion on whether the interest on a loan used to pay off interest on other loans is deductible.

So for example, I draw down $200K c/o increased equity in one IP and use that to pay interest on othe IPs or other expenses that pertain to IPs.....so there's no 'contamination' where the loan is used for expenses of a personal nature. Is the interest on the $200K fully deductible?

Appreciate any feedback.

Thanks
 
IMO it would depend on why you are doing this and where the rent is going.

If you are using the rents to pay the PPOR loan off while you borrow to pay all the interest plus expenses on your IP's
then IMO such claim will be dissallowed.

If you have serviceability issues and you are only covering the shortfall then IMO there should be no problem claiming the interest.
 
If you are using the rents to pay the PPOR loan off while you borrow to pay all the interest plus expenses on your IP's
then IMO such claim will be dissallowed.

Hi, there are recent private rulings which disagree with this comment.

The taxpayer needs to be able to demonstrate two things. That the interest is incurred in generating income and secondly that the tax benefit is not a dominant purpose of the scheme.

If the interest incurred on both loans is purely investment related then generally the tax office will allow the deduction. This satisfies s8-1 as the funds are used purely towards paying the interest on income generating activities.

This is still true when using rental income to pay off your own home loan. A debt-free main residence is a common goal for most taxpayers. Provided the tax benefits of capitalising the interest are not at the forefront of your priorities then Part IV-A will not apply either.

Therefore if the loans and accounts are structured correctly, interest on interest should be deductible for most investors even when using the rental income for private purposes.
 
Hi, there are recent private rulings which disagree with this comment.

Can you point to any of these please?

The taxpayer needs to be able to demonstrate two things. That the interest is incurred in generating income and secondly that the tax benefit is not a dominant purpose of the scheme.

And how can you demonstrate this when you're directing the income from your investment towards a private purpose?
 
Can you point to any of these please?

Hi,
http://www.ato.gov.au/rba/content.asp?doc=/RBA/Content/93035.htm
http://www.ato.gov.au/rba/content.asp?doc=/RBA/Content/94313.htm
http://www.ato.gov.au/rba/content.asp?doc=/RBA/Content/93707.htm

Each of those rulings applies only to the person who applied for them but they do give a clear idea of how the tax office approach these scenarios.

Part IV-A only applies when it can be concluded that the dominant or sole purpose of the scheme is to derive a tax benefit. Clearly this is not the case in these scenarios.


And how can you demonstrate this when you're directing the income from your investment towards a private purpose?

Part IV-A only applies when the tax office can conclude that the dominant purpose of the scheme is for a tax benefit. The direction of funds to personal use does not show that the capitalisation of interest is done purely for a tax benefit. There are numerous reasons why an investor may choose to act in this manner and the above rulings show no concern with such an approach.
 
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satisfying Part IVA of the ITAA 1936

DR. J

Thanks for the links
Ok as I understand it it's possible under certain investment structures for the ATO to allow such a deduction but as it's a gray area we can consult our accountant and use our own judgement before we decide to make a claim or if we wanted to be sure we qualify we can ask the ATO for a private rulling..

In the 3 examples the ATO states that under these particular circumstances obtaining a tax benefit was not the dominant purpose of entering into the scheme. Therefore this scheme is not one to which Part IVA of the ITAA 1936 applies.

I think the best excuses for capitalising interest would be


1. To take advantage of the current undervaluations in the share market,
2. You wish to capitalise on the collateral in your home loan to ensure your lifestyle and capacity to enter into alternative investments is not affected.
3. You would not be able to hold the properties if you did not capitalise the interest.
 
Hi, yes, many things in tax law are shades of gray. However the tax office have made their stance quite clear on this matter. Most investors will capitalise interest with the perfectly valid reason (not excuse) to assist with cashflow and not because of the tax benefit arising from higher deductions. Therefore Part IV-A does not apply.

Section 8-1 is satisfied because the the facility is used purely for investment use. The direction of the income derived is irrelevant. The direction of borrowed funds is the key point here and that is towards servicing investment loans.

As you suggest. Investors should always see their accountant before making such decisions to ensure that they are doing things correctly. This should be a given but thankyou for pointing it out. Whilst we can have some degree of confidence, these things should always be put in the hands of your chosen professional.

Information about applying for a private ruling can be found here, http://www.ato.gov.au/businesses/co...01/003/082/004/001&mnu=43857&mfp=001&st=&cy=1 but I would suggest that talking to your accountant will get you better results.
 
I will suggest taking a Private binding ruling as that way it is specific to one's case and also offers protection against future interpretations.

I have done that and now using the Rental income to pay off the PPOR loan.
 
Which says (I think) the principles governing the deductibility of compound interest are the same as those governing the deductibility of ordinary interest.

Hi, yes, you think correctly. Good addition to the discussion.

Also note that this determination does not consider Part IV-A, though, as such things are circumstantial as discussed above.
 
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