Tax query

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From: Donna Larcos


I keep getting conflicting advice on this
one. If you use an equity loan to pay
expenses on IP and mortgage
repayments, can you claim the interest on
the equity loan as a deduction as well?
I.E. the balance of the equity loan is
growing with the expenses and mortgage
interest and I am then being charged
interest on this?? Some accountants
seem to say it is OK to borrow to pay
expenses such as levies, rates etc but
not the mortgage payments but I have
other friends who use the rental income
to pay down their personal loans and
borrow from an equity loan to pay their IP
expenses and mortgage and then claim
the increasing interest.

Who is right? What are others doing??
Any help, particularly from an IP
accountant, would be most welcome.

Donna
 
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Reply: 1
From: Rolf Latham


Hi Donna

All expenses with the exception of interest can be borrowed and the interest cost of those borrowings can be used to offset income.

However, you can not deduct interest on your interest. This is "capitalising" interest - borrowing the interest.

So while it is ok to run up an expenses LOC you must pay the interest on that LOC each month, otherwise you will be paying interest on interest

Not tax advice either, just my experience

Ta

Rolf
 
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Reply: 2
From: Dale Gatherum-Goss


Hi

I am a CPA and I hope that my thoughts are helpful, although, it sound like you are getting too much advice from too many people who may, or may not, know the answers.

Just because a friend tells you that they're doing something with their tax does not necessarily mean that they are doing it; or, that it is right. Be careful!

(Sounds like the advice my mother tried to give me when I was young and silly)

Last year, the tax office issued a ruling dealing with these issues and so I would have a close read of ruling TR 2000/2. You can find it at:

http://law.ato.gov.au/atolaw/index.htm

and searching for it.

In a nutshell, the tax office opinion (please read my previous comments) is that the interest on the money borrowed to buy the IP is deductible; the interest on the draw down to pay for IP related expenses is deductible; but, drawdowns to pay the capital is not deductible.

This area is one that the tax office looked closely at a few years ago after some unscrupulous (no???!!!) agents tried to sell it as a tax benefit of restructuring your finances.

I hope that this helps.

Dale
 
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Reply: 2.1
From: Rolf Latham


Hi Dale

Very good advice on a perplexing topic for most.

You posted:

"This area is one that the tax office looked closely at a few years ago after some unscrupulous (no???!!!) agents tried to sell it as a tax benefit of restructuring your finances."

Tax minimisation through legitimate means can surely not be regarded as an unscrupulous excercise ?? Just because the ATO later decides to issue a ruling does not mean that the work during that time by "financial people" (including large accountancy firms) was unscrupulous.

The current and ongoing row over "tax effective" investments shows just how inconsistent the ATO really can be. Whats ok today may not be tomorrow, even if you have a private ruling from the deputy commissioner, his boss might not like it 4 years later and retrospectively changes the rules of the game.

Interest capitalisation on IPs and tax effective investments used to work very well when you could claim the deduction and thereby swap non tax deductible debt on your home for tax deductible debt. If you were on a high income this could result in tax savings of thousands of dollars per year.

I am not a tax person - which is just as well I could not keep up with the mines moving on the minefield every day - thats why Dale wears a flack jacket and carries a metal detector :eek:)


Ta

Rolf
 
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Reply: 2.1.1
From: Dale Gatherum-Goss


Hi Rolf!

Agreed on all points.

The issue in particular that I mentioned was about 6 years ago now when some of the finance companies were recommending two loans. The first was your home loan which all monies went into paying off. The second was for an IP which capitalised the interest and was not paid off until the home loan was gone.

The marketing that I saw was very much less than ethical and honest.

Cheers

Dale
 
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Reply: 2.1.1.1
From: Rolf Latham


Hi Dale

Not Ethical and Honest still applies to lots of marketing today, including parts of the lending and financial services industry.

What I am amased at is that there is so little legislation protecting the little guy - yet our various government authorities carry a huge legislative stick to protect themselves - why is that ?

Ta





Rolf
 
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Reply: 2.1.1.1.1
From: G V


Hi everyone,

if you are paying an annual fee,establishment fee(once) for a professional package deal(LOC) under which you can set more than one account say one for home loan and other for investment loan can you prorate the above amount depending on the loan amount under each category and claim tax deduction for the prorate amount under investment account.

thanks
GV
 
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Reply: 2.1.1.1.1.1
From: Rolf Latham


Hi GV

I would say yes. The portion used for investment purposes forms part of borrowing costs and may therefore be tax deductible/depreciable.

Dale's the CPA though ???

Ta

Rolf
 
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Reply: 2.1.1.1.1.1.1
From: Dale Gatherum-Goss


HI

Actually, the answer to this one has more to do with the purpose of the borrowing. That is, if you can demonstrate that the LOC was taken out to finance IP's, then the whole fee will be deductible using the 5 year rule.


Cheers

Dale
 
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Reply: 2.1.1.1.1.1.1.1
From: G V


Thanks Rolf and Dale.

gv
 
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