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Tax treatment for LoC in joint names?

Discussion in 'Accounting, Tax & Legal' started by pthm, 6th Sep, 2005.

  1. pthm

    pthm Well-Known Member

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    We have a Line of Credit in joint names as it is secured by our PPOR (in joint names).

    We have drawn down (used) some of it to purchase shares in joint names so for tax purposes the interest expense on the LoC is claimed 50% each.

    However, if an amount is drawn down from the LoC and used to purchase units in Navra fund in my name (not in joint names), then what is the tax treatment for the interest expense in this amount? Am I entitled to claim all the interest expense on this particular amount because its purpose is for investing by me? Or, can I only claim 50% of the interest expense because the LoC is in joint names?

    Thanks for any comment.
     
  2. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Usually it is the usage of the funds that determines the deductibility, not the source ... so I would imagine there is no problem with you claiming the interest in your own name for those assets that are owned by yourself.

    However, there is a question as to what happens if you ever make payments back into the LOC ? To which drawing does it get applied ? I think there are ATO guidelines on this, but I'd better leave this to an expert - Nick ?
     
  3. pthm

    pthm Well-Known Member

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    Thank you, Sim, very much for your reply. It makes sense that the deductibility of interest should be on the usage and purpose and not the source of funds. You have raised an interesting question regarding the repayment of the LoC. I guess there has to be some kind of apportionment or designation in my own records.
     
  4. NickM

    NickM Co-founder Staff Member

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    pthm
    good question.
    Sim is right.
    The ATO look at who actually utilised the funds to make the investment.

    They get the deduction.

    nickm
     
  5. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Nick - what happens when repayments are made when there are multiple people (or entities) that have drawn down on the same LOC ? How does one apportion the payment to the drawings ?
     
  6. pthm

    pthm Well-Known Member

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    Thanks, NickM, for your confirmation on Sim's view. The follow-up question from Sim regarding the apportionment of interest for LoC multiple drawings is an interesting one. I guess I will have to keep a spreadsheet with different columns for each person(s) and reconcile it against the bank's statements - in the same way I would do for borrowing on the same LoC for multiple properties.

    An extension of this main question is if the LoC is in one name only and the other partner (name not in LoC) wanted to use the money for purchasing units in Navra funds then the named person would draw the $ and lend it to the other partner on a back-to-back agreement on the same interest rate as that charged by the bank. Would this be viewed by the ATO as acceptable?
     
  7. NickM

    NickM Co-founder Staff Member

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    SIm
    This can cause great confusion.

    Meticulous record keeping is essential.

    the best you can do is try and keep track of it, so the interest deductions can be allocated at year end.

    NIckM