Ask Ban Tacs Question
1. Purchased investment Property Feb 2012 with 540K Loan (A). Was rented out 100% of the time until construction began June 2014 for 3 investment units.
2. Drew a construction loan (B) of 450k to build the 3 investment units.
3. Shortly before construction started, we decided that we would live in one of the new units after completion. Construction finished June 2015.
4. All 3 units are on the same title, will be subdivided at the end of the year.
5. Both loans have not mixed with any personal transactions
Based on a previous question asked, you had confirmed that interested accrued during the construction period could still be claimed as a tax deduction.
Question today is:
Given that one of the new units will be my new PPOR, I won’t be able to claim the full amount of interest accrued across loan A and B after the original property was demolished and construction for the 3 units started.
In order to calculate the interest I can/can’t claim, is it fair and reasonable for me to
1. Apportion the loan/interest based on land size ratio of each unit and common property will be evenly divided by 3, even if a shared driveway is actually only used by two of the units
2. If I pay 330k to reduce loan (A) and/or (B), can I selectively nominate that the repayment is directly for my PPOR and the remaining loan balance is for Unit 1 and 2, therefore all future interest accrued is full tax deductible?
3. If the answer to question 2 is NO, what can be done with Loan (A) and (B) in order to achieve this?
If my query is deemed to be more than 1 question, please let me know and I will forward additional payment. Thanks!
Answer
A reasonable method of apportionment is all that is necessary, land size and associated costs is important. You could argue that all three units own the driveway whether they use it all not. Each unit owns one third of the common property. Or did you intend for the driveway to not be common property ie just owned by the two units that use it? It is probably a question for the person who is going to draw up the strata plan. But again the ATO should not give you any grief as long as the apportionment is on a “reasonable basis’. Having said that apportionment on an actual cost basis is more important than size, just depends what you are applying it to. So if one unit was more expensive to build than the other but it is smaller you are still going to have to use the cost as a method of apportionment but when it comes to the land size is a very good measurement.
The ATO rental guide says that you only stop claiming your 1/3rd of the interest once you change your mind.
Now much more interesting is this $330k. TR 2000/2 is the authority on mixed purpose loans http://law.ato.gov.au/atolaw/view.htm?docid=TXR/TR20002/NAT/ATO/00001 paragraph 18 describes the procedure you need to follow. Please follow it to a T don’t let the bank make you compromise. While ever a loan is for mixed purposes any repayments (other than from the proceeds of a sale of one of the asset purchased through the loan) must be apportioned equally between the purposes. So paying $330k off the loan would reduce the loan for each unit by $110k. You need to first refinance these loans. Set up two new loans. One for 1/3rd of the debt and the other for 2/3rds of the debt. Then take your $330k and pay it off the 1/3rd debt. Do not let the bank talk you into just setting up another loan for 1/3rd and leaving 2/3rds in the current loan. It has to be a complete refinance and you need to take the money from the two new loans and pay it off the old loan at exactly the same time.
You will have a pro rata CGT liability on your unit so make sure you keep lots of records of any costs associated with the property even cleaning materials and light globes (section 110-25(1)).
