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Can I claim deductions for finance for a rental property

Interest can be claimed for the cost of funds borrowed to purchase a rental property and to meet maintenance costs or running expenses while the rental property is being let (or is available to be let) under a commercial arrangement to generate assessable income. In these circumstances the interest paid is deductible even if it exceeds the income generated. The deductibility of interest is to be determined from the purpose for the borrowing and the use to which the borrowed funds are put.

A deduction for interest is also available on a loan taken out to:

  • carry out renovations
  • purchase depreciating assets (e.g. furniture)
  • make repairs or carry out maintenance, and
  • purchase land on which to build a rental property.
Redraw on an existing loan

It is common practice for financial institutions to offer redraw facilities against existing loans. Under this loan facility, a borrower may redraw previous repayments of a loan principal. The loan may be for income producing purposes, non-income producing purposes or mixed purposes. In this case, the interest on the loan must be apportioned into deductible and non-deductible components in accordance with the amounts borrowed for the rental property and for private purposes.

Split or linked loans

According to the relevant legislation, a linked loan is “a credit facility taken out with a financial institution under which there are two or more loans with an account being maintained in respect of each loan.” A split loan is “a credit facility taken out with a financial institution under which there is one loan with sub-accounts being maintained in respect of that loan.”

The taxpayer capitalises interest accruing on the investment component of the loan and applied all cash to the repayment of the private component (the interest in respect of which was non-deductible). Thus, the effect of the arrangement in this case is to re-characterise interest (on the home loan) that would have been otherwise non-deductible, as deductible.

When organizing this type of arrangement please remember that in some cases ATO may apply general anti-avoidance provision of the tax law to strike down the use of such a facility.

Therefore anyone taking out a loan to purchase a rental property should carefully consider their financing arrangements. In particular avoid the mixing of accounts that have both deductible and non-deductible components. Professional advice should be sought before signing up to the loan as it is difficult to unwind arrangements that may turn out to be non-effective for tax purposes.

Loan account offset facility

Where the facility constitutes an acceptable “loan account offset arrangement”, the availability of an interest deduction where funds are withdrawn for a private purpose differs to that of a redraw facility.

As a general rule, the ATO considers that a taxpayer with an acceptable loan account offset arrangement with dual accounts is entitled to claim a deduction for the full amount of interest while the loan is used wholly for income producing purposes. Any reduction to the interest payable would typically not be assessable as no amount of interest has been received or credited to the borrower. Significantly, in a number of private rulings the ATO accepts that interest on the loan account will remain fully deductible if funds are withdrawn from the “deposit account” and used for non-income producing purposes.

From a tax perspective, the offset account arrangement provides a more flexible and favourable tax outcome where funds are accessed for private use.

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ATO signals crackdown on popular deduction

The ATO has indicated that it will be paying “close attention” to claims for car expenses that are work related for tax time 2017.

While it’s true that you don’t need written evidence for claims of up to 5,000 kilometres per year, you do need to be able to show that you were required to use your car for work, and how you calculated your claim.

There are several points of confusion for what they can and cannot claim as work-related car expenses. For example, if you make a claim for transporting bulky tools, you need to be able to prove you were required by your employer to take these items to work, and that there was no safe place to store them.

Additionally, you cannot claim expenses that have already been paid by your employer, including salary sacrificing arrangements.

As a rule of thumb, there are three important points to remember when you claim car work related expenses

  • You have to have spent the money yourself and can’t have been reimbursed
  • The claim must be directly related to earning your income
  • You need a record to prove it

Please contact us on anna@ewmaccountants.com.au if you have any questions

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5 smart things to do with your tax refund

For many people, their tax refund is treated like a mini lottery win. This tax time, consider putting your “gift” from the ATO to good use.

Put it into your super

Remember that superannuation pension gets a better tax treatment that other income. Unless you’re already contributing the maximum to your super through a salary sacrifice arrangement, there won’t be many other opportunities to do some tomorrow-proofing.

Reduce or pay off your HELP debt

The ATO keeps track of your HELP debt balance and allows you to pay it off as you go. If your salary is over the HELP repayment threshold ($55,874 for 2018 income year). HELP repayments are levied from your before-tax income automatically, with the rate starting at 4% and rising as your pay increases. You may also benefit if you make a voluntary repayment before indexation is applied on 1 June.

Put it in a term deposit

This could be your chance to have some smart money — that is, money put away in a just-in-case account. Most Australian banks offer higher-interest savings accounts, and while some require minimum monthly deposits, you can’t go wrong letting your tax refund earn some extra returns for a short stretch.

Pre-pay your recurring obligations

It’s a rare luxury to be able to pay any insurances, registrations and re-payment obligations before they roll around. Car registration payments commonly catch people off-guard, and paying extra off your mortgage will save interest on daily compounding rates. They don’t have to be left until last. Bite the bullet – defer those Manolos for now and buy them next quarter when your bills are fully taken care of.

If you’ve got a small business or side venture, invest in it

Business tools and resources inevitably age. Why not use your tax refund to update old equipment or replace not-so-good assets with good ones? If you’re a small business, anything you buy for business use will likely be able to be written off, so you’ve got an extra to use your tax refund this way.

Having a better financial destiny is an age-old fight with discipline, but a tax refund is a chance to take some steps in the right direction.