Join our investing community

Query on Cashflow Mortgage

Discussion in 'Accounting, Tax & Legal' started by DavidJ, 24th Mar, 2007.

  1. DavidJ

    DavidJ Member

    Joined:
    28th Jun, 2006
    Posts:
    22
    Location:
    Sunshine Coast, Queensland
    I've just attended the property expo at Darling Harbour and spoke to a couple of companies there promoting cashflow mortgages. One in particular was promoting that you could capitalise 100% of your interest payments until the LVR was 80%. In the meantime you can take your rental income for personal use. When the LVR reaches 80% you just revalue again and assuming capital growth can go again. I understand there are issues around whether the property will appreciate sufficiently and I can see how cashflow wise this may be useful but my confusion arises because they are saying that the interest on the capitalised interest would also be deductible. The argument is that since it's being used to fund an asset which earns rental income and youre declaring the rental income as taxable income the tax office should be happy. I would have thought that it would only be deductible if the rental proceeds were used for investment purposes, or am i getting very confused. If it is allowable what would then stop you from using the rental income to pay off your PPR loan and would that not be getting awfully close to the principles in the Hart case. Does anyone have any ideas here?
     
  2. Simon Hampel

    Simon Hampel Co-founder Staff Member

    Joined:
    9th Jun, 2005
    Posts:
    4,619
    Location:
    Sydney, Australia
    You are a bit. It's the expenses which need to be for investment purposes ... the income and what you do with it has nothing to do with the deductibility of interest.

    Without understanding the details about their proposition - it's a bit difficult to tell whether it would fall into the same category as that covered by the Hart case. I would tend to be nervous about any structure set up specifically to minimise your tax.

    More investigation and advice required.
     
  3. coopranos

    coopranos Well-Known Member

    Joined:
    11th Oct, 2006
    Posts:
    498
    Location:
    Perth
    I would suggest that you could structure your lending a lot cheaper and more flexible using lines of credit to achieve the same thing. My take on the cashflow mortgage is that it is a catchy name for which they charge a premium.
    Talk to a good mortgage broker and they will probably save you a fair bit of money and achieve exactly the same result for you
     
  4. TryHard

    TryHard Well-Known Member

    Joined:
    17th Aug, 2005
    Posts:
    863
    Good mortgage broker = Rolf_Latham = Mortgage Brokers Australia = lots of trouble and expense saved :)
     
  5. DavidJ

    DavidJ Member

    Joined:
    28th Jun, 2006
    Posts:
    22
    Location:
    Sunshine Coast, Queensland
    Thanks for the help

    Thanks for the help in this regard especially Sim. I think I now follow, it wasnt so much aimed at reducing tax as living from equity. What confused me is that if i revalue my loan to 80% LVR the equity released needs to be spent on investing activities before its considered allowable debt. Following the cashflow mortgage logic, if instead of spending it on personal items I set it aside to pay the interest on the whole loan and any property expenses I would then be free to spend the rental income on living expenses. If thats the case, given enough property growth I would be able to live off equity in this way without having any non deductible debt. Is that correct thinking?
     
  6. coopranos

    coopranos Well-Known Member

    Joined:
    11th Oct, 2006
    Posts:
    498
    Location:
    Perth
    Put some numbers together and you will actually find that by using a cashflow mortgage or using a Line of Credit against an existing property will give you the same result, but the LOC interest rate will be cheaper than the cashflow mortgage. Also on a LOC you dont have to make any repayments into it if there is available credit to draw down on.
    I wont comment on whether living on rent while capitalising interest (or paying interest through a LOC, same thing) will make the capitalising deductible, as the ATO hasnt been clear on this (and removed a draft ruling suggesting that it was allowed). What I will say is if you are using a LOE type of strategy I dont see a great deal of point in worrying about deductible/non deductible debt as you effectively have no taxable income anyway (your rent ill probably not cover your interest on loans against the properties anyway if you are continually buying more).
     
  7. DavidJ

    DavidJ Member

    Joined:
    28th Jun, 2006
    Posts:
    22
    Location:
    Sunshine Coast, Queensland
    Thanks coopranos. I think youre right that perhaps its not worth worrying about the non deductible debt as long as we continue to grow our portfolio and if the tax office has withdrawn their ruling then its probably the safer route without much of a downside.