Ask Ban Tacs Question
Hi,
My wife and I own 2 properties as Joint Tenants. Property A (our Primary Place of Residence – a unit) has no loan owing. Property B (a green title house) was bought with the intent of being an investment property and has been rented from the outset for the last 18 months with an interest only loan and an offset account that we use for general daily banking.
My wife is currently not working and I am in a high tax bracket looking to minimise my income tax.
We would like to move to property B as my wife is pregnant with baby #2 and that property will be more suitable for a family. We would also like to keep property A as an investment. To help minimise tax we would like to refinance property A to claim interest. I understand this may not be possible under current tax laws.
Can we draw capital from our PPR now, generating a new loan and leave the money sitting in an offset account (used for private purposes) until 5 months later when we are ready to move out? Will the interest on this loan then be tax deductible after we move out and rent it? As I am currently requiring the maximum tax benefit can I draw the capital myself up to 50% or does any capital drawn have to be apportioned 50% between us as Joint Tenants? i.e. Can I take a loan out solely up to 50% value for interest deductions?
Thanks,
Jakub.
Answer
You are in a classic situation that many studious couples find themselves in. First lesson is the government has marked you for the rest of your life to support those not so studious.
The rule that is going to hurt the most is that interest is only deductible when the money borrowed was put to a direct income producing use. For example used to buy an income producing asset. It does not matter where it is secured just what it is used for.
So what now? Crunch the numbers, selling the unit and buying another investment property that has 100% borrowings is a lot in stamp duty and real estate commissions.
In ID 2001/79. They argued that one spouse wanted to keep the property and the other didn’t so to settle a matrimonial dispute the keeper spouse bought the other spouse out. The question was whether the ATO would consider such an arrangement to have the dominant purpose of a tax benefit. In this case it was the dominant purpose of resolving a dispute.
Even if this applied in your case it would only free up half the market value to contribute to reducing the mortgage on the house. Is it worth it compared with selling? But at least then it would be 100% in your name so expenses and interest 100% deductible. Stamp duty is a consideration. Some states exempt transfers between husband and wife though she may have to still hold 1%. Be careful that you don’t shoot yourself in the foot and argue that the transfer is a gift when you are trying to argue with the ATO that you bought it off her.
Once you have a debt albeit 50% on the investment property you may consider borrowing to pay the interest and rates etc to increase deductible debt while using the rent to attack the mortgage on the house. Again you cannot do this with the dominant purpose of a tax benefit but maybe ok as a budgeting strategy. After all most Australian’s with a mortgage are working at paying it off asap, an incidental tax benefit won’t change owning their home asap as being their dominant purpose.
In both these scenarios you need (in my opinion) to apply to the ATO for you own ruling that they would not apply PART IVA – dominant purpose of a tax benefit. I think you will be successful with the ruling about buying half off your wife but with the interest one you will be pushed to get them to give you an answer.
