Prepaid interest--Have I done something silly?

From: Patrick Bruadair

Hello all,
I?ve prepaid interest on my IP#1 loan for the year to June 2003 (and so saved some tax for year to June 2002). I have plans approved to develop 3 units on the block of IP#1. To allow development to proceed, I intend to refinance the loan on my PPOR. My PPOR lender will also finance the development (separate loan from PPOR), and I will pay out IP#1 loan. Refinancing will release equity in my PPOR, which will be used to finance the early stage of development. There will be fees associated with prepayment of IP#1 loan. These fees I was aware of when I decided to prepay interest for next financial year, so not a problem.

Question is: will I have a problem with the ATO?. I will get a rebate of a large portion of the prepaid interest from my existing IP#1 lender when I prepay the loan. Should I inform the ATO that I have refinanced?. I plan to ask the new lender to structure the refinance package such that the equivalent of this rebate is prepaid to the new lender, so that I remain ?neutral? from a tax point of view. Would this keep the ATO happy, or will the ATO ask me to pay my year 2002 tax saving to them?.

I?ve read through my query a few times, but I?m not sure it?s clear. Hopefully some investor out there understands it, and can offer some enlightenment!


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Reply: 1
From: Dale Gatherum-Goss

Hi Pat!

No, you should not have a problem with the tax office at all. At the time that you prepaid the interest, your intentions were honourable . . . the change in plans necessitated the change in action.

BTW though, the rebate will be income in 2003 and so you may need to plan ahead on a couple of levels this year.

Good luck

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Reply: 1.1
From: Patrick Bruadair

That's a relief!. Many thanks for your reply.


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