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Tax deductability of borrowed funds

Discussion in 'Accounting, Tax & Legal' started by coops, 27th Feb, 2007.

  1. coops

    coops Member

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    We have recently refinanced some of our loans to access more equity for investment purposes. The extra funds (after the previous mortgage was paid out) were sent to us in the form of a bank cheque.

    NAVRA will not accept a third party cheque even though it would be endorsed to them for deposit into the retail fund.

    If we clear that cheque through our personal savings account and invest an identical amount as soon as the cheque is cleared will we have a problem with the deductability of that loan? It would be quite obvious that the funds are just going in and out, however is this sufficient for a tax audit?

    Hope someone has the answer as we don't want to open yet another bank account just to clear the funds.
     
  2. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    So long as there is a clear paper trail - I don't think you have anything to worry about ... it is not unusual to receive a cheque for proceeds of funds, and they have to be deposited somewhere before you can draw down on them.

    I had the unfortunate situation recently where the bank not only failed to deposit the loan proceeds into my trust bank account as instructed, they actually sent me a check made out to us personally !! Rather than wait for them to correct the error and re-issue the cheque (who knows how long that would have taken !!), I just deposited the cheque into my personal account, and then as soon as that was cleared, transferred the exact same amount to my trust bank account. The paper trail is very clear.
     
  3. coops

    coops Member

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    Thanks Sim - sounds like commonsense to me.

    coops
     
  4. MrDarcy

    MrDarcy Well-Known Member

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    Have a look at this from Bantacs under "Losing Interest Deduction":

    Bantcs.

    Tax law and common sense... about as separate and business and personal finances.

    Have a chat to good accountants on this matter and get professional advice. Losing deductability is too import to risk and hard to get back.
     
  5. DaveA

    DaveA Well-Known Member

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    in this case i know if the account is empty when you deposit the check that is ok, maybe you could clear this account out just for a few days and let the cash sit in an offset account

    otherwise would anyone know if you say have a cheaque deposited for $5000 into a bank account of $100, i know this is mixing funds, but if worst comes to worst, could you claim interest on $4900 as you could argue there is no way you could of put more than $100 of private money into the investment?
     
  6. MrDarcy

    MrDarcy Well-Known Member

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    When I'm stuck and can't keep investment and private separate, that's what I do. So as private funds and investment borrowings never mix, I empty the private transaction account a day before the borrowed funds are deposited. This way they are "clean". It's of a lot of bullsh!!t, but the ATO opinion is quite clear.

    I do keep seperate investment and private accounts, but from time to time it can't be helped. Just keeping a good paper trail is not safe enough for me, borrowed investment funds should not mix.
     
  7. coops

    coops Member

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    Thanks everyone for the advice - I think we'll play it safe and deposit into an empty account.

    coops