Who is entitled to the interest deduction ?

OK - thought I'd ask interest deduction claim question.

Here goes ...

• IP A - Owned outright under both wife and my name.
• 80% of total IP A value redrawn and invested in MF.
• Managed Fund is under wife's name only.

For tax purposes -
Income is split 50/50.
Interest is what I am not sure about. Should it be split 50/50 also or should it be claimed under wife's name ? MF under wife's name only.

 

I believe that the person owning the asset that the funds were borrowed for gets the deduction.

 

Although the loan is secured against the jointly owned property, deductibility is determined by the purpose of the borrowings, not the underlying security.
You could probably make reasonable arguments either way, since the loan would likely be in both your names you may suggest that it was an administrative error that the managed fund is only in your wifes name, therefore you should both be entitled to half the interest deduction.
I havent actually seen any rulings on such things, but I would imagine they would be dealt with on a case by case basis with the ATO, but I have no idea what their leanings would be on such a thing. Perhaps some on here in public practice may have come across this previously

 

I agree with Simon & that is how I do it.
When mentioned to someone recently, they disagreed & I would love to be able to prove it.

 

Same as Gad and Simon, this is what I would think:

Rental Income - split 50/50 (as that is the ownership of the asset).
Managed Fund Income - 100% to your wife (as that is the ownership of the asset.
Interest on Funds to invest in Managed Fund - 100% deductable to your wife as she owns 100% of the asset(managed fund).


Tis the same with property. If Mr is the only one on the title of the property and Mr and Mrs are on the loan - Mr can claim 100% of the interest on the loan as he is the sole owner of the property.

That is my understanding anyway.

 

It is an interesting one, which I cant find much info on.
From here:
You and your shares 2006-07

Shares can also be owned in unequal proportions. You have to be able to demonstrate this – for example, with a record of the amount contributed by each party to the cost of acquiring the shares. Dividend income and franking credits are assessable in the same proportion as the shares are owned.


A conclusion could be drawn from this that if the loan is in joint names (which i would imagine it would be), then both parties have contributed to the purchase, therefore the shares should be correctly held in the same % as the loan. After all, you cant claim an interest deduction on borrowed funds that havent been borrowed by you.
I am unsure if the wording of the original loan agreement actually states a % attributable to each party of the loan, so perhaps you could argue that your spouse has 99.9% liability for the loan.
As far as the ATO is concerned, it is probably just as important that it has been done consistently (ie not deducted in your wife's return this year and your return next year).

 

I might be over-cautious but I would err on the safe side.

Recently the ATO has been very technical about rigorous tracing of the use of borrowed funds - e.g. Domjan (AATA 815).

The Commissioner might argue that although you have a joint borrowing, Mr has lent his funds to Mrs for no consideration under a domestic arrangement. i.e. only the 50% of the interest attributable to Mrs borrowings is deductible. He may argue that the splitting of income is avoidance if Mr is on a lower tax rate.

You both might just like to confirm in writing that although Mrs is the sole name on the investment, that both are equitable joint owners of the investment - and always have been. This will add to other evidence such as joint names on the borrowing and jointly declaring income.

Is anybody else as cautious as me, or am I paranoid ?

Cheers,

Rob

 

Just because you are paranoid doesn't mean that people aren't watching your every move

I am pretty sure that my post is correct but I am not inclined to search for a ATO ruling on it...

Cheers,

 

ATO ID 2002/363 (Withdrawn) - Rental Property - proportion of deductions claimable

Although withdrawn, I would imagine the tax rulings it refers to come to have the same conclusion (although I cant be bothered plowing through it right now!)
Looks like Simon is correct - seems to only matter that 1) the funds were applied to the asset, and 2) whose name is on the title of the asset.

 

I think you are right in this particular circumstance as the interest expense has been apportioned the same as the declared income and it is a common domestic arrangement. It may just be an accepted practice.

Technically though, Mr has to demonstrate that the interest expense on his share of the borrowing was incurred in deriving HIS assessable income. So he must show clearly that he has derived income from the investment even though it is owned by somebody else (his wife).

Cheers,

Rob

 

Thanks Coopranos, I think that explains it all well enough. Certainly the way I have always believed it to be. I'll certainly print this off & direct some others to this thread.

 

OK so this ruling is withdrawn claiming TR 95/33 and TR 93/32 cover it adequately.

Why introduce the ID 10 years after and then withdraw it again a few years later ?

I think the quote of Napier v Public Trustee (Western Australia) is the relevant material. i.e. the courts will accept equitable title

 

Sorry, got cut off before completion:

Napier: Rebuttable presumption of equitable title when assigned to a spouse or dependant child.

Support for this presumption will be joint ownership of the loan and declaring joint income.

However, the ATO reference to TR 95/33 and possible 'schemes' might put you on notice. Specific reference to subjective purpose etc. where deductions seem excessive or income inadequate. Straightforward negative gearing should be OK.

As an aside, if anyone now decides to change their declaration of income & deductions to split income - will the ATO take this as an assignment of beneficial interest and assess the 'legal' owner for capital gains on the portion 'disposed' of ???

Cheers,

Rob

 

Wow ... a lot of interest here and it looks like I may not be the only one in this situation.

I'll be ringing my accountant this week to see what his thoughts are.

I appreciate everyone's response so far.

 

Hiya,

I, like Simon and gad, believe that the interest is deductible for the person who owns the investment.

So, if your wife owns the funds, then she 'owns' the loan and therefore can claim the interest. The fact that your name is on the loan is simply a banking issue and does not affect who had the right to the deduction.

Cheers

James.

 

Hi Guys
I agree with James
based on ownership not on loan split

NickM

 

I must be missing something here ...

The use of the borrowed funds decides the deductibility of interest.

The money is used to purchase an investment in one (legal) name only.

The courts will make a rebuttable presumption that this investment is in joint names for a domestic relationship. Hence if you have jointly declared income the ATO will presume joint equitable ownership of the investment.

I presume the loan against the existing IP is in joint names as the bank might get a bit grumpy unless the other goes as guarantor. If the loan is only in one name then it is a bit more complicated.

If you jointly declare income, but all the interest deduction is in only one name and they are the higher tax payer then you might expect some scrutiny from the ATO.

What did your Accountant say ?

Cheers,

Rob

 

OK - finally got thru to my accountant.

His response was that the person claiming the income and who also owns the assets (in this case my wife ) should claim the entire interest deduction. Regardless if the loan ( against IP ) is under both names.

So ... this is how we will handle it unless the ATO decides otherwise

 

That sounds fine ...

I thought you had already declared joint income.

Cheers,

Rob

 

Rob G. - the 50/50 split income I mentioned was IP rental income not MF income.

Apolgise for the confusion here.