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Private Tax Ruling - Implications?

Discussion in 'Accounting, Tax & Legal' started by Insan3, 21st Feb, 2008.

  1. Insan3

    Insan3 Active Member

    Joined:
    15th Dec, 2007
    Posts:
    33
    Location:
    Cairns, QLD
    I'm considering a Cashflow strategy for my investments, similar to what is mentioned in another Thread here, linking to the Somersoft forum source. Many of you would be aware of this strategy.

    Interest on Interest and Capitalising Interest - the Facts - Somersoft Property Investment Forums

    I need to get some advice on the ATO's standpoint regarding my structure, so I am considering applying for an individual ruling. The reason being, I believe many accountants would shun the idea on principle, or on their thought/lack of understanding, but not based on definitive rulings or laws.

    What ramifications are there as a result of applying for a ruling? Would I be making myself a target for further investigation or audits?

    I understand the forum states it is fine, but I want a certainty I won't get stung in years to come.....

    I'm looking at -
    -Setting up a LOC to fund existing IP Loan
    -Using LOC to pay Rates, Interest, etc.
    -Offset Accounts (Transaction A/C, Savings A/C, Investment Income A/C) all offsetting my PPOR. (Yes I can have this many offset accounts)
    -Using Investment Income A/C to pay for some of my living expenses
    -Using Savings A/C, credited only with Employment income, to pay down PPOR, creating more equity to then....
    -Extend LOC 1 and open another LOC for Index Fund/LPT/whatever investment

    No investment income touches my PPOR debt directly, both IP Loan and LOC should then be tax-deductible, as both are used for Income Producing Activities (Purchase of, and Expenses of)
     
  2. MattR

    MattR Well-Known Member

    Joined:
    23rd May, 2007
    Posts:
    229
    Location:
    Sydney
    The problem with a Ruling is you are bound by it!

    You can't come back to the ATO later on and say "hey I didn't know that, please be gentle with me".
     
  3. Insan3

    Insan3 Active Member

    Joined:
    15th Dec, 2007
    Posts:
    33
    Location:
    Cairns, QLD
    Yeah, but is it not much better for them to stop your idea from day one, rather then knock on your door in 10 years time for you to THEN find out they disapprove. I doubt they would be gentle in either case.

    A ruling on what may become a pain in the backside is better than an ACTUAL ATO audit in my backside....
     
  4. Billv

    Billv Getting there

    Joined:
    15th Jul, 2007
    Posts:
    1,796
    Location:
    Sydney, NSW
    If it worries you so much then you should ask for a private rulling.
    The problem with many ATO regulations is that they are open to individual's interpertation.
    They could have made it all simpler so what's allowed and what's not
    allowed is clear but they chose not to.

    When you get audited, the ATO will want to know the reasoning for having such a structure and if your reasoning was to avoid tax they will dissallow it.
    If your reasoning was business related or harm minimisation IMHO they will have no option than to allow it.

    Today, interest rates are very high and the rents are low so in many cases if an investor does not borrow to fund interest and other IP related costs he will go broke.

    For many investors selling is not an option because over the long term
    things will turn around. Rents will go up, interest rates will come down, the investor sells, makes money, pays his CGT, the ATO is happy and all is sweet.

    Cheers
     
  5. Insan3

    Insan3 Active Member

    Joined:
    15th Dec, 2007
    Posts:
    33
    Location:
    Cairns, QLD
    Cheers BV,

    You actually pretty well summed my exact position up.
    We bought a block of land for PPOR, but with our -ve geared property and rising rates, we would be really struggling to build anything decent any pay it off. So, it isn't about the Tax Deduction, it's about Cashflow and spending less of our Private Income on the property, and being able to re-direct our Rental Income to diversification (Shares/MF). The Deduction is just a minimal bonus.
     
  6. GavinC

    GavinC Active Member

    Joined:
    11th Apr, 2007
    Posts:
    27
    Location:
    London
    ATO should allow this, it's fairly straightforward, even if your investment income was used to pay off your home loan there is nothing wrong with it. The only issues would be to keep your LOC strictly for income producing purposes, and the ATO don't like taxpayers capitalising interest even though I am sure the case law is against them on this.
     
  7. Rob G.

    Rob G. Well-Known Member

    Joined:
    6th Jun, 2007
    Posts:
    717
    Location:
    Melbourne, VIC
    Looks like a variation on debt recycling method.

    Cheers,

    Rob
     
  8. NickM

    NickM Co-founder Staff Member

    Joined:
    20th Jun, 2005
    Posts:
    321
    Location:
    Sydney
    here are a couple of ATO rulings to help you.
     

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