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PUBLIC TAX DETERMINATION DT2008/27 |
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DECEMBER 2008
Public Tax Determination TD2008/27
http://law.ato.gov.au/atolaw/view.htm?locid=TXD (then follow the prompts)
TD 2008/27 has now clarified the position for the public generally.
The factors that will determine the deductibility of interest are:
1. the deductibility of an interest is determined by its essential character.
2. the essential character of interest is determined by the reason it arises, which is usually determined by the purpose to which the loan is being applied, when the interest and capitalised interest arises.
3. generally the purpose of a borrowing can be determined from the use of borrowed funds.
Most importantly the Commissioner states that the “principles governing the deductibility of compound interest are the same as those governing the deductibility of ordinary interest: The Commissioner accepts that this is the law following the Full Federal Court decision in Hart.”
In Hart’s case Hill J also noted that “it is artificial to treat compound interest as the cost of some new fund divorced from the original borrowing.”
Provided that from year to year the investment asset remains as an income-producing investment (as opposed to becoming an owner-occupied property) then, all other matters being equal, the interest and compound interest the should be deductible under s.8-1 ITAA 1997.
Investor clients with personal debt can make considerable savings in interest by utilising a loan structure which includes a capitalising investment line of credit facility. This capitalising feature provides them with a buffer to meet:
1. unexpected maintenance costs or rates which might otherwise impact on personal cash flow.
2. the shortfall between rental income and interest payments that would otherwise be subsidised by personal income.
Take a scenario where:
1. the taxpayer has a home loan of $250,000 and an investment loan of $472,500.
2. He draws down against available funds under his investment line of credit to meet an annual shortfall of say, $20,000 p.a. ($1666 per month). Interest capitalises.
3. He applies the $1666 “saved” as an additional repayment to his home loan.
In this scenario the taxpayer can repay his home loan within 8 years generating an interest saving of $386,936.00
As tax time approaches why not take the opportunity to review your investment loan structures to ensure that they are delivering the best outcome for you.
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