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What are the implications of the following?

Discussion in 'Accounting, Tax & Legal' started by Ol School Skata, 22nd Jan, 2006.

  1. Ol School Skata

    Ol School Skata Well-Known Member

    Joined:
    7th Nov, 2005
    Posts:
    71
    I have $40K available in IP LOC.

    Partner has not purchased PPOR previously.
    Partner is eligible to FHOG and stamp duty concessions
    I am not eligible for FHOG - previously claimed. (OSR has advised partner is eligible for FHOG as does not meet living together requirements as definition of 'spouse')

    I withdraw $40K for deposit for partner to buy PPOR in her name. Loan is in joint names.
    We both move in for 12 months.
    Move out after 12 months, and rent IP out.

    Can i claim the interest on the $40K redraw when property is rented? Can i also claim interest on the loan used to buy IP? If no, can partner claim full interest on loan used for property?

    The reason for us considering this is to seek the FHOG. Should we continue to explore this or is it a case of short term gain for long term pain (missed tax deductions etc, complicated structure etc)
    Can she claim the full amount
     
  2. NickM

    NickM Co-founder Staff Member

    Joined:
    20th Jun, 2005
    Posts:
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    Location:
    Sydney
    You cannot claim the interest on any of it as you are not on title.

    Partner could potentially borrow the $40K from you and then pay you the interest which in turn you pay to the lender. Your position is nil, Partner claims the deduction when it is available for rent.

    Partner can claim interest on all borrowings after she moves out. Imperative to make good use of an offset account here.

    I would actually go to the trouble of documenting the loan.
    Both from an ATO perspective but also to protect your position.

    If you pass away or she leaves you or to be really pessimistic, if you both pass away at the same time, it may leave you or your estate $40K short.

    Blame the accountant and the lawyer for advising you to have an agreement in place.

    cheers
    nick
     
  3. Ol School Skata

    Ol School Skata Well-Known Member

    Joined:
    7th Nov, 2005
    Posts:
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    When you say document, is this an arrangement we can draw up between ourselves or are you suggesting a solicitor to draw something up?

    Will it make any difference if i live with my partner in this unit, for taxation or legal reasons?

    I understand your comment in regards to effects on my estate.

    OSS
     
  4. Nigel Ward

    Nigel Ward Team InvestEd

    Joined:
    10th Jun, 2005
    Posts:
    1,172
    Hi Skatey

    Without meaning to pry, if you're going to live with said partner then won't the FHOG eligibility actually be lost?

    If you're going to live in the property then the purpose of the loan will be to buy a PPOR (as evidenced by getting the FHOG and SDUTY concession) and thus the interest will have a personal or domestic character and will NOT be deductible whilst you're living in the property.

    In my view any proposal where you lend $ at your own cost of funds is IMHO difficult to defend if the ATO argues that it is part of a scheme to give a payment of a primarily personal nature a business or investment character. If you were charging a margin over your cost of funds (which of course then becomes assessable income for you) then its a better position.

    What I'd ask you to think about though is whether in the long term getting the FHOG and stamp duty concession is worth putting this property in your partner's name. Is that where you want the property long term? I guess that will depend on your plan.

    Cheers
    N.
     
  5. NickM

    NickM Co-founder Staff Member

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    Location:
    Sydney
    If you draw up a loan agreement between yourselves that is generally sufficient. (nigel ?)
    it should be witnessed by an independant party.

    Regards
    Nick
     
  6. Nigel Ward

    Nigel Ward Team InvestEd

    Joined:
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    Posts:
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    Yes...but the big question Skatey is do you know what it should say? ;)