Interest payments for Line of Credit (LOC)

Hi all,

I've just set a LOC for investing into funds. The bank has currently got it set up with interest payments being debited from the LOC account itself. ie, interest is compounding; i think it is also called capitalising interest?

i am a little unsure about whether interest needs to be paid using a different account (eg, offset or savings) instead of compounding. Since i intend to negative gear - i don't want any hassles with ATO

For those who have successfully negative geared in the past using similar structures, would you kindly share how you are doing your interest payments.

Thanks in advance,

PS: i will be checking with my accountant . but thought it better to hear from others too...thanks!

 

Oops sorry - just found a thread that answers my question. It looks like capitalised interest IS tax deductible - at least when the thread was started late last year

If anyone knows/thinks otherwise, please do post a reply here. Thanks for reading!

 

There have been a couple of tests of this, in particular private rulings from the ATO.

However, this is not binding across all taxpayers, only the individual concerned in the year concerned.

So nobody except the ATO can answer this question for you.

Having said that, allowing the interest to compound within a LOC that is entirely for income deriving (ie investment) purposes is generally assumed as reasonable and deductible.

But keep this in mind: if you set up this structure to minimise tax (ie simply to turn the compound effects of interest into an enhanced tax deduction) then you are in trouble. In other words, I suggest you need to be able to defend this structure with other reasons, eg:
- otherwise you'd have to sell down your investments, which you don't wish to do;
- you have cashflow issues that means that you can't meet interest repayments each and every month.

I have a similar structure (I pay the interest on two investment LOCs out of one of them) and I am confident in my reasons for doing so (both of the above).

But I reiterate: this has not been ruled on generally, only via taxpayer-specific ATO private rulings.

 

Tax Ruling TR 2000/2 is good reading on loans.

But capitalised interest is not specifically covered.

Look to the use of the additional borrowings (the capitalised interest component) - and also your reason for it.

Cheers,

Rob