Canterbury Property Services

Few questions for interesting forum

Hi,

I have read all comments here and I am not fully clear here on following point:

1.) it is questionable if it is LOC paying for the interest as such or simply STG bank is simply allowing interest to cumulate over time till you hit ceiling. There might not be difference but maybe there is...same thing different station...?

2.) I am missing point here where there is advantage... I would not care if I pay PPOR in 2 years or 8 if it simply means redirecting money from IP to PPOR. sooner or later you need to pay cumulated interest anyway...

So where is the time saving hidden here in comparison of paying your PPOR and interest on IP under normal investment loan?

Especially when you tax deduct only interest over original value of IP purchase price not over cumulated IP purchase price.

And in this case you can simply say that tax deductions from tax man are your money and how you use them is anybody's personal choice. Especially if the tax return value is always over original IP purchase price plus 2.5% construction deductions plus plant deductions . . .

If value of IP property is rising it is rising same speed no matter how you pay PPOR or IP...

If you however try to claim tax deductions over cumulated loan IP than there is advantage of doing it but isn't this double dipping? For what I read here I do not think they do this.

Finally I wonder if someone is having PPOR and than investment property (normal one) and only than you would get third fourth with cumulative loan LOC SYSTEM with deducting cumulative interest than you do not pay PPOR quicker or save tax but you maximising investment outcome....

My 5 cents to this discussion... Any thoughts?

 

Yes.

1. I don't think it is questionable. Capitalising interest is not paying a loan and letting the interest be added each month. This is borrowing to pay the interest.

2. Overall your loan balances would be the same with this system, assuming all payments were the same overall - you are just paying off the main residence loan faster while the investment loan increases at the same rate.

But the benefit is the investment loan is deductible whereas the main residence loan is not. This therefore increases your deductions.

This is why it could very well be labelled a 'scheme', by the ATO, with the dominant purpose of claiming a tax deduction that would otherwise not be available.

It is anyone's personal choice at how they structure the set up, but you cannot expect to be able to claim extra deductions if you are breaking the law.

Have a read of TD 2012/1 and read it in full - even if you don't understand. TD 2012/1 - Income tax: can Part IVA of the Income Tax Assessment Act 1936 apply to deny a deduction for some, or all, of the interest expense incurred in respect of an 'investment loan interest payment arrangement' of the type described in this Dete

also read the Compendium for this document. TD 2012/1EC
TD 2012/1EC - Compendium (As at 7 March 2012)


Google "TD 2012/1" too and read some commentary.

 

Terry,

I have read all. Above you state:
- It is a good strategy...

Why do you say that?

 

IF you can do it in a way which is acceptable to the ATO then you can rapidly convert non deductible debt into deductible debt and save thousands in tax.

 

That explains why you also mentioned above you support Canterbury in what they doing...

It can be also highly assumed that they know how to do the IF part and they know how to save thousands in tax. ( under current tax rule that keep changing).

With this in mind it is also clear that client have only 2 options:
1.) simply trust them based on the fact they are in game long time and they know how to do IF
2.) take documents that are to be signed to independent accountant layers to look bank agreements...although not sure how many of them are familiar with such complexity...

Another aspect is risk. 2 risks to manage. One is to have strategy what to do if in future rules change and what is currently OK would NOT BE OK in future. I am sure there can be method to manage risk there.
And second is similar. Having clarity what actions to take if as you mentioned before properties would decline in value.

Secondly if you change deductible loan into non deductible saving thousands on tax within ATO rules I wonder if price you pay for this benefit is IP with negative equity meaning that market value of IP is much much lower than what you owe bank. This is at time point of just paying PPOR OFF.
From this point onwards the cash that you used to pay PPOR is than used (I assume) to quickly reduce this market versa loan balance difference or you wait till market takes care of it.

Finally I wonder if they use same approach to pay to change deductible to deductible capitalised loan and than next IP to pay previous IP and so on... When PPOR is fully paid off...

Internet these days is free speech tool and as such not happy people would be writing ... But there is only positive or doubt. This also indicates that it is simply a case that they know how to do IF and if they help people while getting paid by banks and developers than there is no party that is loosing including ATO.

 

Dominique,

There is a third option and that is to apply for a private ruling - this is where you get the ATO's 'approval' before doing something.

Also don't worry about the loan on the IP increasing as overall your loans will be decreasing it is just that you stop paying one and divert all the income to the other.

As for once the PPOR loan is paid off there is no real point in capitalising loans anyfurther unless you have other non deductible debt - or if you were thinking of upgrading the PPOR for example.

 

Happy with Canterbury

Hi All,

Just wanted to give you an update. I spoke to Canterbury and they have explained everything (again ). Feel bit ease now. While talking to their finance person , I found out apparently they have 3800 clients so far.

so this strategy is working for so many people.

Only thing , not many bank DON't understand ( at least person on the phone end) Capitalising Interest./ and Limit re-balance .. they keep on saying your loan is interest only loan, and we don't know any product of Capitalising Interest ....

Terry thank you for the extended explanation. It helps everyone , even the silent readers.

Venom : nice to know you are at the SLAB stage, I will wait for the council approvals . (early stage)... Update us with the developments ... I will do the same.. Anyone else please let us know your progress...

 

The banks certainly do understand capitalising interest. But it is not allowable under most LOC products so you need to look for one that does allow it.

Even if the bank does not allow it you can set up an interest only loan with a separate LOC and you pay the interest from the LOC.

Saying banks don't understand it is nothing but sales talk.

Just because so many people are doing it doesn't mean it is allowable either. In fact this makes it even more risky as the ATO is likely to notice it more.

 

Terry. It seems to me that if market property values increase by same% as what is interest of loan over IP than capitalising interest grows while equity grows same rate so in some way you get extra money forPPOR while IP stays neutral... Hmmm...

it is interesting to read this thread. Banks do understand perfectly well but similar to insurances some of them do nothing but full flood coverage (high risk for them) and some only storm water....

When it comes to many people doing it I picture this nice wide strong current river across which there is a bridge on top of which there is a man with gun but no one knows if he has bullets or not Someone made a business of lending kayaks for free telling people the guy on the bridge is bluffing about bullets. history confirms it is true because many people got across the river paddling there and back ... And there is another way to do it. going to the man on the bridge and ask him if you can cross the bridge. If he is ok you have a friend if not you become three time bigger...

The fourth way is to walk the bridge without asking

Why the man on top of the bridge does not place signs around with clear rules is probably because he knows there is no bullets so pretending he has works in most cases to achieve objective...

Not sure if analogy is fully correct but it seems like that..

Government and ATO should realise that the world, economy and society will not stop if they encourage people to get ahead instead of believing that longer people stay poor and struggle the better.. economy.. This is because utilisation of taxes for benefit of society can be also achieved by people spending their money on right things benefiting others ... not only by government collecting money thinking they know better where it needs spending... Helping all.

Someone clever said. It does not matter how many millionaires society has the more the better. ... The important thing is to ensure continuous improvement of minimum living standard/quality... And there is more than just one way to do it...

 

Dominique,

What if you were to speak to the man on the bridge and get his permission and guarantee not to shoot you while you crossed. Wouldn't this be the safest bet?

 

Yes. That would be best. Saying that I am not 100% sure but for some reason (maybe I have read it somewhere) is it true that even private ruling that is approved is not 100% guaranty? Or is it?

 

This is what I have found on the ATO websi

How to apply for a private ruling

 

Hi dp and all, dp glad you are a bit more at ease now, hope you stay on here throughout your progress with your IP etc, and am glad you have not been scared off, I have said before they do not claim on the capitalized interest, only the interest of the original loan, I understand and Im only a Bricky haha, I have crunched the numbers and have found even not claiming ANY interest you will progress faster paying off PPor by putting all your rent, normal payment on your house and a bit more if you can, then when you payed off PPoR you put all that money into IP easy. Claiming the capitalized part of your loan does not add up to much anyway. hopefully can update the slab stage next week as all this rain has slowed things down up here:

 

This is interesting - Not claiming the capitalised interest.

Imagine a $300,000 house renting for $300 pw or $15,000 per year.

Interest on $300,000 at 6% = $18,000 pa.
So after 1 year you would owe $318,000 pa, but would have paid off another $15k from your non deductible home loan using the rent.

You would only claim interest on the $300,000 if you are not claiming the capitalised component but borrow to pay the interest so the full $15k goes off your home loan.

I haven't got the energy to crunch numbers but this strategy has merit i think.

 

Ok. Lets make it clear. There are following components in question on IP.

1 - Tax deduction over cumulated extra portion over IP original purchase price
This part is and was always not to do part. Do not claim deductions over cumulated portion interest

2 - tax deduction over original purchase price loan interest - always
This part I was not sure if OK but I was thinking rather not to.

3 - tax depreciation as 2.5% on construction of IP property cost
This part is real and I was thinking this is OK

4 - rental income
This part was ok in my view except I was not sure if it is full amount or after paying tax on rent amount because it could be considered as positive income hence subject to tax

5 - depreciation on plant
This was ok in my view as this is real provided IP IS RENTED.

So. If you choose to capitalise IP which of he components above are definitely ok and which are definitely off limit and which maybe and if rental income is taxed or not...

My understanding is this:

5 yes, 3 yes, 2 yes, 4 yes but not 100% sure if rent needs to be taxed as income if positive....
1 definitely NO EVER.

If you choose rent only and no others is it than positive income subject to tax?

 

Some more info:

http://www.bantacs.com.au/QandA/index.php?xq=420

Borrowing to pay expenses...article

http://www.bantacs.com.au/newsflash/Newsflash_258_1st-November-2012.pdf

 

Dominique,

Sorry your post is very unclear. What I think you are getting at:
1. Borrowing more than the original loan amount - interest on this will only be deductible to the extend the extra funds are used for business or investment.

2. Claiming interest on the original loan amount - usually deductible. But it depends how you have conducted the loan. if you had a LOC used to pay to the property and you put your salary in and living expenses out, then after a while none of the interest would be deductible.

3. Depreciation of building cost is available if built after a certain date - includes renos, repairs etc.

4. Confusing - Rent is income and you pay tax on this. But, if your expenses are more than the rent then the taxable income relating the property will be negative and you may then use this to reduce your overall taxable income.

5. depreciation on fixtures and fittings can be claimed. Best to get a quantity surveyor in to determine this.

6. If you capitalise interest it changes none of the above.
This work out the capitalised amount. If the underlying loan interest is deductible then the capitalised part would be deductible, BUT, still subject to the ATO denying the deduction if you have done it for the sole reason of claiming an extra deduction.

If you are renting and not living in a PPOR it doesn't change anything. Same principles apply, but you won't be 'paying off your home loan sooner'. There could still be a tax advantage though as you would be increasing deductions.

 

Terry,

One more question. Lets say that your PPOR is fully paid off and you are interested to develop (with bank money) high end property (well good quality) and sell it with intention to make profit and pay tax on it. As such you decide that you will not rent it because it is hard to sell new high end property with people living in it.

Plus lets say it will take 1 or 2 years to sell it.

In this case it is not PPOR it is IP but because intention is to sell for profit and pay tax on it and more importantly it s not rented so in fact is is not deductible loan.

Does capitalising interest makes sense in this case same as in case of PPOR?

I mean by establishing rental IP and direct all towards high end development...

 

Firstly, you probably wouldn't want to do a development in your personal name for several reasons.

But if you did this and capitalised the interest that would generally be allowable. The problem is where this is a scheme to pay off your home loan sooner - if you don't have a home loan then you wouldn't be paying it off sooner. (but could be saving up the rent and wages in the offset account to make a big deposit for a future main residence I guess).

 

The answer

That was theoretical question as most developers run often temporary business entity structures to protect themselves...

Back to your question that has not been answered as what you would say if auditor would ask question why you borrowing to pay interest...capitalising interest....

My answer would be to tell the truth. "To maximise the most powerful goal in investing in properties which is to maximise number (qty) of properties in portfolio."

Lets face it saving tax on its own or even paying PPOR sooner is not the real goal. It is the number of IP properties that counts. Property booms do not come around every day and we all know this is the most powerful gain. How would people invest in property if boom would only happen in say every 20-30 years and no one would know when? Knowing you only have one run not two or three?

They would try to multiply this one only boom by maximising number of properties you have.