澳洲Australia property Compound Interest - New ATO Ruling | Sydn


在澳大利亚 Hi Guys, Ive found a property that has mentioned two payments coming up of $1400 to apparently top up the admin fund and 2 have just been paid. Im looking at a financial statement (basically a balance sheet) for the strata and its all a bit Hi all, I currently have a PPOR and 10K cash in the bank which I plan to use as a deposit for a IP early next year. Is it possible for me to place this into my PPOR loan and then redraw the 10K when Im ready for the IP and then claim the int


Hi

The ATO have issued a new ruling that is good news for investors wishing to compound interest on their LOC..

Here it is in full

Dale

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ATO Interpretative Decision
ATO ID 2006/298
Income Tax
Deductibility of compound interest on a line of credit facility

FOI status: may be released

CAUTION: This is an edited and summarised record of a Tax Office decision. This record is not published as a form of advice. It is being made available for your inspection to meet FOI requirements, because it may be used by an officer in making another decision.

This ATOID provides you with the following level of protection:

If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.



Issue


Is the taxpayer entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for compound interest incurred on funds borrowed, under a line of credit facility, to acquire an income producing asset?

Decision


Yes. The taxpayer is entitled to a deduction under section 8-1 of the ITAA 1997 for compound interest incurred on funds borrowed, under a line of credit facility, to acquire an income producing asset.

Facts


The taxpayer took out a line of credit facility, with a financial institution, which was divided into two sub-accounts.

One sub-account was used to acquire an income producing asset (investment sub-account) and the other sub-account was used for non-income producing purposes (private sub-account).

There were no fixed minimum principal and interest repayments required by the lender.

The taxpayer made no payments off the investment sub-account until the private sub-account had been repaid in full.

As interest was capitalised on the investment sub-account, compound interest, being interest on the capitalised interest, accrued on the investment sub-account.

Reasons for Decision


Section 8-1 of the ITAA 1997 allows a deduction for any loss or outgoing that is incurred in gaining or producing assessable income to the extent that it is not of a private, capital or domestic nature.

The deductibility of an outgoing is determined by its essential character ( Lunney & Hayley v. Federal Commissioner of Taxation (1958) 100 CLR 478; (1958) 11 ATD 404; (1958) 7 AITR 166).

The character of interest is determined by the purpose of the borrowing. Generally, the purpose of a borrowing can be determined from the use of borrowed funds and outgoings of interest ordinarily draw their character from that use ( Fletcher & Ors v. Federal Commissioner of Taxation (1991) 173 CLR 1; 91 ATC 4950; (1991) 22 ATR 613, Kidston Goldmines Limited v. Federal Commissioner of Taxation (1991) 30 FCR 77; 91 ATC 4538; (1991) 22 ATR 168).

It is therefore generally accepted that ordinary interest incurred on funds borrowed to acquire an income producing asset is an allowable deduction.

In Hart v. Federal Commissioner of Taxation (2002) 121 FCR 206; 2002 ATC 4608; (2002) 50 ATR 369 it was held that compound interest, as with ordinary interest, derives its character from the use of the original borrowings.

In this case compound interest was incurred on funds borrowed, under a line of credit facility, to acquire an income producing asset. As such, the compound interest was incurred in earning assessable income and is an allowable deduction under section 8-1 of the ITAA 1997.

Note: While the general anti avoidance provisions of Part IVA of the Income Tax Assessment Act 1936 are not considered applicable in this case, the application of Part IVA depends on a detailed analysis of the facts of each case. The Commissioner considers that a scheme in relation to a loan facility would need to have the same features as those set out in paragraphs 16 to 19 in Taxation Ruling TR 98/22 before Part IVA could be applied.

Date of decision: 5 October 2006

Year of income: Year ended 30 June 2006



Legislative References:
Income Tax Assessment Act 1936
Part IVA

Income Tax Assessment Act 1997
section 8-1

Case References:
Fletcher & Ors v. Federal Commissioner of Taxation
(1991) 173 CLR 1
91 ATC 4950

Hart v. Federal Commissioner of Taxation
(2002) 121 FCR 206
2002 ATC 4608

Kidston Goldmines Limited v. Federal Commissioner of Taxation
(1991) 30 FCR 77
91 ATC 4538

Lunney & Hayley v. Federal Commissioner of Taxation
100 CLR 478
(1958) 11 ATD 404
(1958) 7 AITR 166

Related Public Rulings (including Determinations)
Taxation Ruling TR 98/22
Taxation Ruling TR 2000/2
Taxation Determination TD 1999/42

Keywords
Borrowings & loans
Deductions & expenses
Interest expenses
Part IVA

Date of publication: 27 October 2006

ISSN: 1445-2782




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Nice one GG. The ATO is back in my good books today.:)  

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Thanks for posting that Dale  

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Interesting ..............................

Should change some sternly held views

Thanks Dale

ta
rolf  

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Thought this was already the case, but it is nice to have clarification.

Thanks Dale.

Regards
Marty  

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I was actually thinking about this today.

My setup is almost identical, but I was considering making repayments on my I/O investment property loans from the deductible LOC sub-account and paying down the non-deductible sub-account as fast as possible.

In this case, would the deductible LOC sub-account still be fully deductible, or is there some tax law that prevents me doing this.

For example

I have 2 Investment property loans I/O which total $3000 per month.

I have a LOC with 2 sub-accounts. On sub-account has non-deductible personal expenses in it, totalling, $20 000. The other sub account has deductible expenses totalling $10 000.

I propose to pay $3500 per month into the non-deductible account in order to pay off this loan as quickly as possible.

While I am doing this, I propose to pay $3000 per month from the deductible account to service my Investment property loans.

Once the non-deductible loan is paid off, the $3500 per month would be used to pay down the deductible LOC.

I'm not looking for specific tax advice here (I'll be running this by my accountant shortly), but a general "can't see any problem" or "You will likely have a problem because..."  

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Thanks for your time in sharing this, Dale.  

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Someone else has asked me the following:

As a general sweeping statement - the compound or capitalisation of interest is allowed, if there is evidence in subtantiating the purpose test for property (or any other business) investing (using LOC) to generate income.

But is it allowed to generate loss as a result to claim negative gearing benefits(where the income is siphoned to payoff personal debt)? This makes the threshold compliance line blurred.


Can you make any comment please Dale?  

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Thanks for sharing, Dale.

I just want to let you know that your comments increased my bottom line by tens of thousands of dollars over the last few years.
And you even don't know me! Thank you!

Cheers,
A95  

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Maybe the ATO has been following Corsa's thread on capitalising interest...:D  

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Thanks for the heads up. Helps us stay in touch while we are OS.  

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Is this similar to a case a little while ago, which was ruled as tax avoidance? This is seperate to the compounding interest issue.

A person had a loan split into sub accounts, one for investment, and for personal use. All repayments were directed to the personal sub account first, until is was paid off.

I seem to remember the deduction was disallowed under Part IVA, because the sub account structure had no purpose other than reducing overall tax paid, and was therefore avoidance?

Dale, are you able to confirm? Perhaps this has been overruled since then?

- Dave99  

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Hi Dave

Yes, this is very similar to Hart's case.

There has been a shift in sentiment in the courts and the tax office but I note that this ruking talks about a LOC where there is no fixed repayment requirement and perhaps it is this distinction that separates this case from the ATO.

Either way, this is a potentially huge issue as a planning mechanism to repay the family home mortgage quicker thus replacing non deductible debt with deductible debt.

Funny though....twice in the last two days I have been approached by clients who actually work for the ATO and who saw a newspaper article distributed in the ATO's own internal newsletter and who were interested in implementing something similar to improve their own situation.

I think we will now see quite a few mortgage brokers promote this idea in a new wave of marketing.

Dale  

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Hiya Simon

Looking closely at what is coming out of the tax office it seems that the traditional view is bluring.

It is still early days yet and I am sure that we will see the real experts comment on this before too long. As soon as I see anything worthwhile, I will be sure to post it here.

Dale

Simon said: ↑
Someone else has asked me the following:

As a general sweeping statement - the compound or capitalisation of interest is allowed, if there is evidence in subtantiating the purpose test for property (or any other business) investing (using LOC) to generate income.

But is it allowed to generate loss as a result to claim negative gearing benefits(where the income is siphoned to payoff personal debt)? This makes the threshold compliance line blurred.


Can you make any comment please Dale?Click to expand...
 

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Hi

If funds are being withdrawn from the deductible LOC and used to repay non deductible debt then I would put on my conservative hat and say that traditionally this would be enough to create headaches with the tax deductions on the interest on the LOC.

The new rules may have blured this though.

However, I would be inclined to look closely at the ruling and see if you can use it to your advantage by non making any repayments at all on the deductible LOC and depositing more funds into the non deductible LOC.....

IF and only if the LOC conditions do not require a repayment.

Ceratinly talk to your bank and your accountant and step carefully.

Dale


Puppeteer said: ↑
I was actually thinking about this today.

My setup is almost identical, but I was considering making repayments on my I/O investment property loans from the deductible LOC sub-account and paying down the non-deductible sub-account as fast as possible.

In this case, would the deductible LOC sub-account still be fully deductible, or is there some tax law that prevents me doing this.

For example

I have 2 Investment property loans I/O which total $3000 per month.

I have a LOC with 2 sub-accounts. On sub-account has non-deductible personal expenses in it, totalling, $20 000. The other sub account has deductible expenses totalling $10 000.

I propose to pay $3500 per month into the non-deductible account in order to pay off this loan as quickly as possible.

While I am doing this, I propose to pay $3000 per month from the deductible account to service my Investment property loans.

Once the non-deductible loan is paid off, the $3500 per month would be used to pay down the deductible LOC.

I'm not looking for specific tax advice here (I'll be running this by my accountant shortly), but a general "can't see any problem" or "You will likely have a problem because..."Click to expand...
 

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Thanks for posted this Dale. This ruling is similar to my (and I'm sure others) private ruling so it is good to see a consistent line from the ATO on the subject of compound interest deductibility. I hope this make the disbelievers take note.  

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DaleGG said: ↑
Hiya Simon

It is still early days yet and I am sure that we will see the real experts comment on this before too long.

DaleClick to expand...
You kidding me?

You are the expert in my eyes :) :)  

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With regards to this being similar to Hart's case:
http://law.ato.gov.au/atolaw/view.h...991231235958&recnum=4768&tot=4791&pn=ALL:::JA

the ato released this on the same day as the 2006/298 atoid. This one is probably closer to Hart's, and interestingly you will note that although the conclusion seems to be that a split loan arrangement would be treated in a similar way to a LOC arrangement, the ATOID ends with: "Notwithstanding the above conclusion, the Commissioner will apply his discretion under Part IVA of the ITAA 1936 to disallow the deduction. A full and detailed explanation of the reasons for the application of Part IVA is set out in Taxation Ruling TR 98/22."

I guess the major benefit of these ATOIDs is that if the commissioner does decide to disallow these interest deductions, you probably wouldnt be slapped with penalties and GIC.  

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Thanks for the info guys. I'm sure this is going to give my accountant a few headaches as she works out what is allowed and what isn't.

For me it's not so much the tax issue, as it is to pay down that non-deductible debt as quickly as possible, and making sure that I keep the deductible and non-deductible debt completely seperate.

I've just managed to get myself out of having a LOC contaminated with non-deductible debt, and I don't want to be heading down that way again.  

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DaleGG said: ↑
There has been a shift in sentiment in the courts and the tax office but I note that this ruking talks about a LOC where there is no fixed repayment requirement and perhaps it is this distinction that separates this case from the ATO.

DaleClick to expand...
So, do 100% IO offest loans fit into the "no fixed repayment requirement"?

My understanding is that these loans offer the same functionality as LOCs.

Say I have a 100k IO offset loan which I want to use for "property investing expenses" ie. rates, IP loan interest etc... I fully draw the loan a/c and put it in the offset a/c. I effectively have no repayments until I start drawing from the offset a/c. Same as an LOC with zero balance

As I start drawing from the offset a/c to pay for my IP loan interest and other deductible expenses, I will be charged interest which is calculated on the difference between the loan a/c and the offset a/c. This interest would be taken from the offset a/c effectively compounding interest.

The repayments will change as the offset account is drawn up. Would this be classed as having no fixed repayment requirement?

Any comments?  

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