variable loan separation for investment purpose and interest payment.

Question

I have a variable loan with limit of 450k which i can use to buy proprties. I m intend to use part of this money to do renovation on 4 existing IPs that , 2 hold 100% my name, 1 hold 100% husband name, 1 is held 50%/50% tennants in common. My accountant suggest I break those reno cost into indiviual sub loans for tax deduction purpose. there will be cost associated with this and my bank manager has very little interest doing this for me. I want to know if I can get away with combine all the reno cost and purchasing IP cost under this one big loan, as long as I label each cost clearly with clear book keeping record and do not mix them with personal use. So i know exactly which amount is for which IP , to use % dividing between each cost and the tax deduction portion for ownership % for that amount. Is this possible to do ? for me it is a simple divide and multiply provided i have clear record showing which amount is for which IP ?

I also intent to use some of the variable loan as buffer to pay for the shortfall of the holding cost of some more IP I m going to add this year. In order to save a bit of interest, my bank manager did this variable loan to me instead of a my normal Line of credit. Unlike LOC , this thing does not pay for itself from it’s own limit. my banker said you pay interest from the day you withdrawl the fund. so what about my beloved buffer ? do I withdrawl a chunk bit out and put in my savings to pay for shortfall but incurr interst the whole lot from day 1 ? Or shall I withdrawl whatever amount is due on that month from the same varialbe loan and repeat the same behavior every month? sounds bit silly to me.. I never used this thing before i always use LOC before.

hope to hear from you.

Answer

I have emailed you our apportionment calculator to give you an example of the sort of records you are going to have to keep. This calculator only splits a mixed loan into two you, would need to modify it to track at least 4 separate apportionments. Or you may prefer to set up you own. The bottom line is your accountant gave you very good advice. Tracking would be a nightmare, let the bank do it for you by splitting the loan. To do it all in one loan you would have to record separately each transaction putting it in the appropriate column for the property it relates to then each month work out the ratio between the properties and apportion the interest and fees on that basis.
I am not sure I fully understand the second part of your question so please let me know if I have misinterpreted. I gather you are intending to use the “buffer” to make the interest repayments on the loan. This is called capitalising interest, borrowing to pay interest on a loan. The ATO is dark on this for property investors. They have no problem with businesses and share investors doing it but fear the flood gates will open if property investors are allowed to do it. Of course this sort of discrimination will not stand up in court so they threaten people with Part IVA but will do anything to avoid going to court because they will probably lose and the media would be all over it. So in short if you want to claim a tax deduction for the interest paid on the money you borrow to pay interest you will need to be prepared to fight the ATO all the way to the front steps of the court. If you don’t claim it but do use your buffer to pay it then your mixed purpose loan is going to be even harder to track, in fact impossible. Here is a link to the whole capitalising interest issue http://www.bantacs.com.au/capitalising-interest.php the picture of the owl gives you an idea of how I feel about the matter.
You are also faced with a similar problem in borrowing to pay the short fall in holding costs refer the letter from the ATO on my capitalising interest page http://www.bantacs.com.au/docs/Latest-word-from-the-ATO-on-Interest-Deductions.pdf this is how far the ATO are prepared to take it but it is a one off letter, no ruling on the issue.
I am assuming here that you have some debt that is not tax deductible, for example a mortgage to buy your own home. If you have no non deductible debt then the ATO would have difficulty arguing Part IVA

In short this is a very complex issue but my advice to you is:
Take your accountant’s advice and split up all the loans
Make sure you make the interest payment on the loans from non borrowed funds
Try to keep any drawings from the loan for only improvements or unforseen circumstances
Avoid drawing money out of the loan and putting it into a savings account. The ATO will argue that it has been drawn out for private purposes (Domjan’s case). It is important you can show a direct nexus between the drawing of funds from the loan and the expense payment.
Our booklet on claimable loans will give you the background information you need. http://www.bantacs.com.au/booklets/Claimable_Loans_Booklet.pdf

. .
Have a question about tax you need answered?

. Ask your own tax question here for only $79.95