Guess what? The ATO has got sick of taxpayers directing rent from their IPs to their PPOR mortgage and effectively turning non-deductible debt into deductible debt, regardless if the dominant purpose is to pay off the PPOR mortgage as soon as possible and the tax benefits are secondary.
TD2011/D8 has been released in draft:
http://law.ato.gov.au/atolaw/view.h...e of 'paying their home loan off sooner' ...;
Major ramifications for many when this goes final...
Next you will be directed what credit card to use to pay your IP rates
this is a rehash of the debt recycle strategy ruling that someone got bounced on a while ago.
One of the keys here MAY be to ensure your properties arent crossed and there are other ways to get this done and not fall foul of this draft ruling
Any accountants here that can provide further clarifications ? Does that mean that we can no longer capitalize the interest on the LOC ?
I can sense a collapse of the property prices when this is passed.
Investors without the LOC to finance the IP interest payment will not be able to have a cashflow good enough to cover all the IP interest. Hence, selling... lots of selling, same amount of demand -> price dropped.
Can't believe that this is happening.
Above are just my personal view.
The line of credit typically has no minimum monthly repayment obligations provided the balance remains below the approved limit. Alternatively, it may require minimum monthly repayments equal to the accrued interest.
The home loan, investment loan and the line of credit are each secured against the taxpayer(s)' residence and/or investment property.
This seems to be the key. It focuses on it being a line of credit.
This will not lead to a collapse of the housing market. It might lead to some individuals losing their interest deductibility. If you are dependent on the taxation benefits and on those alone then you have a greater problem. You have overextended yourself if you don't have the cashflow available without the taxation benefits.
Vitamin said: ↑
I can sense a collapse of the property prices when this is passed.Click to expand...That's very funny.
Considering the property market is 70% OO's who get no tax benefits from paying off their own property (or owning it outright).
Of the 30% of the remaining property market, I'd guess a fraction of a % point of investors might be into debt recycling, especially since the prominant case over 7 years ago of Federal Commissioner of Taxation v Hart in May 2004 (although there were differences).
This TD leads to more queries:
Does a tax refund, once received, need to be deposited into the LOC (and not the PPOR mortgage as most do) to the proportion that the IP generated the refund? Could be very difficult to calculate.
And if you've got a margin loan do the dividends generated from the shares held within such need to be deposited against margin loan (and not the PPOR mortgage as most do) so as not to increase (apparent) non-deductible interest?