Tax deductibility of loaned capital loss

[Gazz]

Hi,
I am looking at upgrading my PPOR and am considering selling an investment property to increase my borrowing capacity. I have an investment loan secured against the property (funds used to purchase the property) which i will repay with the sale proceeds.

When I purchased the property I also borrowed some funds under an investment line of credit loan to fund purchase costs.

The sale proceeds might just fall short of being sufficient to repay all of the line of credit borrowings. In this situation how is the interest from these borrowings treated from a tax perspective in the future? Does the interest remain tax deductible each year until the loan is ultimately repaid?

Appreciate your thoughts on this.

 

[twodogs]

Yes, I do. Can't recall the TR involved and requirements, will check and post detail (unless a real accountant beats me to it).

 

[Terry_w]

In some circumstances the interest on a loan used to acquire an investment can continued to be claim after the investment has folded or been sold at a loss/an amount that does not cover the original borrowings.

 

[twodogs]

yes, i do. Can't recall the tr involved and requirements, will check and post detail (unless a real accountant beats me to it).

tr2004-004

 

[AXXO]

Thanks twodogs, that's TR 2004/4.

That ruling also explains the deductibility of interest even prior to assessable income being earned. Such as buying land, then building an IP on it to derive rent, which could take a year or two. Interest in that situation would be deductible even though no rent is returned in a tax return for the year the IP is being built.

Just be aware that to keep the deductibility of interest incurred after assessable income ceases the nexus cannot be broken between that interest and the former income earning activity. Such as refinancing for another private purpose or extending the loan for reasons unassociated with the former activity.

 

[twodogs]

Tr 2004/4

Hi Axxo,

Looking at the provisions for interest after income ceased, I found the important parts to be that:

- the loan is clearly associated with the original investment
- maintaining the loan just for the sake of it could be seen as a provide a private advantage. So in my case no private debt is being repaid while these loans are claimed and, any subsequent sales of assets always go first to paying down this debt and never to private debt or new investments.

My accountant seemed to nod knowingly when I explained the above, I took that as being "yes you are probably correct but I didn't advise you".

 

[Rob G.]

ATO has a strong dislike of LOC in this situation.

See TR 2000/2 example 5.

Ignore the issue of mixed purpose loans and look at the shortfall in proceeds.

The problem being that it is regarded as a monthly refinance.

Maybe convert to a separate loan that can show an enduring connection with that shortfall ?

You need competent advice on this before acting. By competent, I mean an adviser that is familiar with the complex area of interest and tax deductions. Many advisers are unaware that the area is even complex !

Cheers,

Rob

 

[AXXO]

Hi Axxo,

Looking at the provisions for interest after income ceased, I found the important parts to be that:

- the loan is clearly associated with the original investment
- maintaining the loan just for the sake of it could be seen as a provide a private advantage. So in my case no private debt is being repaid while these loans are claimed and, any subsequent sales of assets always go first to paying down this debt and never to private debt or new investments.

My accountant seemed to nod knowingly when I explained the above, I took that as being "yes you are probably correct but I didn't advise you".

I agree twodogs. If you are capable of repaying the old debt you do so. It's the first priority otherwise you are gaining an advantage unassociated with the previous income earning activity and the nexus is lost. Indeed subsequent sale of asset proceeds should be used to pay that debt first.

It boils down to a judgement thing, no two cases are exactly the same. It's a situation litigation lawyers love.

 

[AXXO]

ATO has a strong dislike of LOC in this situation.

See TR 2000/2 example 5.

Ignore the issue of mixed purpose loans and look at the shortfall in proceeds.

The problem being that it is regarded as a monthly refinance.

Maybe convert to a separate loan that can show an enduring connection with that shortfall ?

You need competent advice on this before acting. By competent, I mean an adviser that is familiar with the complex area of interest and tax deductions. Many advisers are unaware that the area is even complex !

Cheers,

Rob

I agree with your summation Rob G.

LOC's can be a nightmare when dealing with tax deductibility of interest at any time. A spreadsheet calculation is needed when there are private draw downs.

Unless there is good reason I wouldn't recommend LOC's for investment properties.