Ask Ban Tacs Question
Is it legal to debt recycle in order to pay off a PPOR? I have several IP’s (+ geared)with small mortgages. Can I direct their rental income into my PPOR mortgage (which is quite large) and at the same time capitalise the interest on the loans of the IP’s? The object of course being to pay off the PPOR as quickly as possible. I have read one of your previous articles on this but it seemed inconclusive and was, I think, several years old.
Many thanks if you can help.
John……….
Answer
Yes it is legal providing you do not do it with the dominant purpose of a tax benefit. We have a PBR from the ATO stating that they would not consider it to be a scheme with the dominant purpose of a tax benefit if you simply used all available funds including the rent to pay your home off sooner. Our successful argument was that most people spend 20 years of their working life endeavouring to pay their home off asap if doing so involves a tax benefit it does not make this the dominant purpose. The dominant purpose still remains to pay off their home sooner.
Now it is very important to make sure that you don’t get caught up with Hart’s case so the loan arrangement cannot be a product marekted by the banks and the loans cannot be linked though they can share security. You also need to be able to prove that eventually the rental property will be profitable ie the capitalised interest cannot get out of control. Don’t argue that the profit will come from the capital growth of the property because that will give them fuel to say the capitalised interest is a capital cost. You need to make sure you keep everything very tidy, that there is no mixing of private and rental expenses and that drawings from deductible LOCs go direct to rental expenses. We recommend that you apply for you own ruling based on your particular circumstances to be confident that they will not apply Part IVA. This will involve crunching the numbers on some forecasts such as when the home loan will be paid out and when the rentals will once again be positively geared. The somersoft software is a useful tool for this. You can also borrow for the rental rates, insurance etc.
We have only just received the PBR so expect to hear a lot more about it soon, in our Newsflash
