Tax and legal advice

Interest expenses – when are they deductible?

By Phillip Tarrant

For most geared investors, interest is generally the largest deductible claimed against rental income, writes Shukri Barbara, so it demands the most attention

When interest on a loan helps to produce a rental loss over a financial year, an investment property is referred to as ‘negatively geared’ and the property can be ‘controlled’ using a small deposit with the help of a large loan.

The net loss is generally offset against the owner’s other income, reducing the tax payable, and this makes the investment property more attractive. Ensuring that interest can be claimed as a deductible is therefore critical.

For interest to be deductible, the principal loan funds borrowed have to be applied to an income/rental producing asset. Apportionment is necessary where the loan is used to fund both a rental investment and a private asset.

Record keeping is essential in these situations.

Many investments are acquired by couples, partners or families. When they have children, some couples lose an income as one stays home to look after the children. The other partner then uses their sole income to pay the interest on a loan that is in both their names.

So, is the working partner able to claim 100 per cent of the interest paid as a deduction on their tax return? The simple answer is no. A claim for deducting interest expenses can only be made on the basis of equity on the title.

If the stay at home partner has no other income, the net rental loss can be carried forward to offset income in subsequent years, but they lose out on tax savings in the current year.

Planning ahead can maximise tax benefits by changing the proportion of ownership – say from 50/50 to 99/1. This can be done for one property. Ownership of future acquisitions can also be framed to suit the circumstances where the stay at home partner returns to work.

Sometimes, interest and loan repayments made by members of a family syndicate are based on their capacity to pay and, as such, differ from the equity portions reflected on the title deed. Calculating an equalising factor is only available privately – for example, by agreeing that net proceeds after capital gains tax on sale be distributed to reflect the contributions.

Again, meticulous records need to be kept to avoid conflict.

Solutions that offer a faster reduction of a home loan balance while maximising deductions of interest on rental investments should be carefully scrutinised. ‘Split’ loans in their various forms generally mean interest on the investment loan is capitalised, while all income including rent is directed towards reducing the home loan with its non-deductible interest expense.

This type of arrangement is considered tax avoidance in its extreme forms. Interest on the capitalised interest is not deductible.

Given the attitude of the Australian Taxation Office (ATO) – and its access to data – it is recommended that rental income be deposited into the rental investment loan account to cover the interest expense. When rent is less than interest and other expenses, using another loan, including a line of credit, is practical.

The interest on that component should be deductible. Where the line of credit is also used for private expenditure, keep detailed records to calculate the deductible portions of interest and to explain to the ATO in case of an audit.

Detailed documentation is also recommended when consolidating several small loans into one or two new loans on a re-structure or when borrowing more to finance a next investment after a positive revaluation.

Records help to match interest expenses against the rental of each property thus minimising the chance of an ATO enquiry about why a claim for interest expenses has changed dramatically from the previous year.

Consulting your financial adviser or property tax specialist is always best before entering into a transaction.

Shukri Barbara is principal adviser at Property Tax Specialists www.propertytaxspecialists.com.au

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  string(5) "18177"
  ["title"]=>
  string(51) "Boost for investors as app sets up off-site bidding"
  ["alias"]=>
  string(55) "boost-for-investors-as-new-app-sets-up-off-site-bidding"
  ["introtext"]=>
  string(144) "

Property investors are now able to identify and bid on auctions remotely using a new live-streaming functionality launched by Gavl.

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Called “Request an Auction”, the new functionality enables users to watch and bid on any Sydney or Melbourne auction remotely.

Through Gavl, prospective buyers are now able to register to bid on their preferred auction. The platform will obtain permission from the listing agent and confirm within 48 hours.

Vendors can also request to have their auctions broadcast to a larger buyer audience.

Co-founder Joel Smith said that auctions streamed on Gavl attract 47 per cent more viewers than traditional ones.

He said that Request an Auction will be valuable for remote buyers.

“Buyers are able to have Gavl attend any auction they nominate, so they will never have to miss out on an opportunity due to logistical complications in physically attending the auction.

“Vendors, too, have the opportunity to directly book an auction with us, so they can open up their event to buyers all around the world. With more potential buyers, they’re giving their property the chance to receive more bids and maximise their sales result.”

Mr Smith said that prior to the Request an Auction app, buyers were limited to what they could achieve through the Gavl technology.

Gavl is a live-streaming and bidding platform for real estate auctions.

Mr Smith said that it has streamed more than 6,000 auctions, which have achieved 3.5 million views from 50 countries.

Gavl’s Request an Auction function is currently being offered in Melbourne and Sydney only.

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Boost for investors as app sets up off-site bidding
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Having to split her time between Hong Kong and her original base of Sydney has not slowed Julia Tita’s goal of building a high-performance Australian property portfolio. Instead the resulting alterations to her strategy have positively impacted her investing success.

" ["fulltext"]=> string(3579) "

Having recently purchased her 6th property, Julia joins host Tim Neary to discuss her journey, share her ups and downs over the years, and reveal her thoughts on why some properties are better than others.

Julia also explains why she no longer makes a move without the help of a buyer’s agent, why working with a strong team of specialists is extremely important and discloses her long-term property ambitions.

If you like this episode, show your support by rating us or leaving a review on iTunes (The Smart Property Investment Show) and by following Smart Property Investment on social media: FacebookTwitter and LinkedIn.

If you have any questions about what you heard today, any topics of interest you have in mind, or if you’d like to lend your voice to the show, email [email protected] for more insights!

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AREAS MENTIONED:

Eagleby
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["secure"]=> int(0) ["page_description"]=> string(11) "sample desc" ["page_rights"]=> NULL ["robots"]=> NULL ["access-view"]=> bool(true) } ["initialized":protected]=> bool(true) ["separator"]=> string(1) "." } ["displayDate"]=> string(19) "2018-06-18 03:15:56" ["slug"]=> string(72) "18171:how-a-move-to-hong-kong-impacted-julia-s-australian-property-goals" ["catslug"]=> string(28) "45:smart-property-investment" ["link"]=> string(92) "/investor-stories-1/18171-how-a-move-to-hong-kong-impacted-julia-s-australian-property-goals" }
How a move to Hong Kong impacted Julia’s Australian property goals
object(stdClass)#1207 (52) {
  ["id"]=>
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  ["title"]=>
  string(88) "‘Common’ referrer practice of being paid on both sides of the fence coming to an end"
  ["alias"]=>
  string(82) "common-referrer-practice-of-being-paid-on-both-sides-of-the-fence-coming-to-an-end"
  ["introtext"]=>
  string(246) "

The practice of property investment firms sharing undisclosed kickbacks among the supply chain involved in development sales will be outlawed in NSW on 1 July this year under the Real Estate Reform being handed down by regulators in NSW.

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Property commentator and valuer, Suburbanite’s Anna Porter, said the reform will address conflicts of interest.

She said they arise when a mortgage broker, accountant or financial planner receives part of the commission from the property firm, who receive their fees from the developer or seller.

“This puts the broker into a position by which they are being paid on both sides of the fence,” she said.

“Until now this has been a grey area and there was nothing stopping this practice.” 

Ms Porter said this has been a common practice in the industry.

"Some well-known mortgage broking firms openly admit to receiving $5,000–$10,000 per referral in their pocket.”

She also said this process has been going on for decades.

"Property investment firms commonly pass some of their commission on to the mortgage broker, accountant or financial planner as a reward to them for passing on the referral. This means that many brokers or financial service providers are making significant amounts of money just to refer on to a property firm, often totalling hundreds of thousands of dollars a year," Anna Porter said.

Ms Porter said the Property, Stock and Business Agents Amendment (Property Industry Reform) Bill 2017 will be in force from July this year, and will prohibit this practice unless the broker or referring partner also holds a real estate industry license.

"Under the new laws, if the broker takes a referral fee from the property firm, they will have to be a licensed real estate agent and also hold a corporation’s license,” she said. 

“Subsequently, every transaction that they receive a referral fee from, they will be putting their license up against the transaction and taking full liability for the conduct, practices and outcome of that transaction, even if they have little to do with the transaction; they are a party to it financially and therefore take as much risk as everyone else in the transaction.”

Mr Porter said where a referrer holds a real estate license, and receives a part of the sale commission, they may find themselves in breach of the ethical requirements under the act.

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‘Common’ referrer practice of being paid on both sides of the fence coming to an end

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