tax- trust debt transfer

[Bushy]

G'day all ,
I posted this last week and lost the reply with the changeover.Sorry for the hassle Dale.
My wife and I have 3 positive geared IP's in our own names that have increased in value by obout 80%.We have also purchased more properties but they are through our Family Trust .If we were to get a LOC using the extra equity in the first 3 IPs as security and had the original I/O loan repayments of these 3 IPs taken out of this LOC would the interest payable on the LOC be tax deductable.
Hopefully the answer is yes. If so over time our first 3 properties will become -ve geared and provide tax relief and the IPs in our Trust will become more +ve geared creating more for distribution to low income family members

Thanks Bushy

 

[Richard Hunt]

Hi Paul,

Rather than set-up one LOC to service the repayments on the 3 properties, another approach may be to set-up 3 separate LOC’s to service the repayments on each of the 3 properties and allow the repayments to capitalize on these LOC’s. The advantages of this is that it is much easier to monitor the loan balances outstanding on each property (particularly when your capitalizing interest) which will assist at tax time when your calculating P&L’s on each property. It also simplifies the process of retiring the correct amount of debt if and when you sell one or more of the properties. In addition, if you can avoid x-collaterisation, then depending on the particular state, you may minimize any mortgage stamp duty costs on the refinance.

As many lenders are now discounting the rates on LOC facilities and waiving mthly fees, multiple LOC’s are a viable cost efficient alternative.

The question of the extent to which the interest capitalized will be an allowable deduction was recently re-visited by the courts.

Apart from looking at the issue of whether split loan facilities were caught by the general anti-avoidance provisions (Part IVA) of the tax legislation, Hart’s case also dealt with the much wider issue of the deductibility of compound interest incurred on borrowings. All the judges were unanimous in their conclusion that the compound interest would be an allowable deduction.

While the case may ultimately be appealed in the High Court, if the views of the judges to date are any indication, it seems that the more contentious issue for consideration at any appeal will be the application or otherwise of Part IVA and not the general deductibility of simple/compound interest.

Hope this helps.

 

[Bushy]

Hi Richard ,
Thanks very much for your reply.I had overlooked the possibility of retiring debt in the future .The 3 LOC seems the way to go
Thanks again Bushy