My wife and I are interested in the following strategy; purchasing a rental property and capitalising the investment loan interest, so that we can use the net rent to pay down our non-deductible home loan at a faster rate. This obviously means that the balance owing on the investment loan will increase substantially over time.
Lenders will only approve an investment loan of >100% of rental property value if they hold security over both properties against the investment property loan.
Question: What loan structure must we organise with our lender so as to avoid Part IVA?
(I understand that a private ruling for a rental property that we already own is the only way to be 100% sure of avoiding Part IVA, but I want to be sure to set the loans up properly when purchasing the rental property)
Well, yes the only way to be sure that the ATO will not apply Part IVA in your circumstances is to get a ruling to that effect. We already have a ruling but it is a private ruling so you cannot use it to defend yourself against the ATO.
Nevertheless the fact the private ruling exists and if your circumstances are similar should help you sleep nights without a ruling of your own. Because we are always so outspoken against promoters who say they, have a clever trick if you just pay their fee for their special arrangements. We emphasis the importance of getting an ATO ruling rather than just taking anyone’s word for it. But we realize people have to see that it is worth spending the money. So we have streamlined and template the approach to provide a ruling as cheaply as possible. Our bottom price in perfect circumstances is $350. You just have to weight up your sleeping soundly factor.
It is hard to make a ruling binding when you don’t actually have a property in mind. The ATO can always argue that your circumstances are different so the ruling is no longer binding. I also like to wait until after you have purchased the property so that you are less likely to look like the whole arrangement was primarily to generate a tax benefit.
You will need a normal interest only loan for the rental property. It doesn’t matter where the security is. Then you need to organise a LOC where the interest repayments and other rental expenses come out of. You will probably need to go back to your lender on a regular basis and increase the cap on this LOC. The bank will be happy to do this by reducing the cap on your home loan which would have gone down considerably. It is important that none of these loans are linked in any way other than sharing security. In particular do not enter into a floating cap arrangement between the loans. It is worth the effort of going back regularly and re arranging the loans.