Can you claim the extra interest after increasing the loan on your Australian property?
Australian tax advisor Steve Douglas shares the most money-savvy way of managing your overseas property loan.
When you own an Australian property that produces income, then you are entitled to claim any costs incurred against the income to reduce any potential tax payable on the income. This includes interest on any loan that was used to help purchase the property.
Many assume that as long as the loan is secured against the property, or was originally used to buy the property, all future changes to this loan will also be a tax deduction.
But this is simply not the case. In order to claim an interest expense, you must be able to show that when the loan was advanced, it was used for the purchase of the income-producing property.
A major problem occurs when the loan is paid down or increased, and new funds are drawn against it for another reason. This new reason will determine if the new loan is allowed as a tax deduction.
For example, if you withdrew A$10,000 from your home loan for a holiday, this portion of the loan would not be considered as part of the claimable home loan, but as a “holiday loan” that is just secured against the house.
The interest cost of the A$10,000 new loan would not be allowed as a tax deduction against the rental income. As the holiday was a private expense, the interest cannot be claimed.
Many property owners withdraw some of these new loan funds for the purchase of another income-producing property.
In this case, the new loan advance will be allowed as a deduction against the new property, as the funds were used on the new property at the time the bank gave you the funds.
If the loans are combined in the original account and not separated, then the allocation of interest is on a proportional basis.
This is especially true when you consider that one day you may move into one of the properties as your personal residence. If so, any interest cost would no longer be a tax deduction as there is no longer an income on the property.
As such, any loan reductions that you could make need to be applied to the loan that was solely related to the purchase of the home you now live in, so you would want to identify that and direct any funds to that loan only.
If the loans are combined, it is essential that you separate them prior to any repayment, as the tax office considers the loans to be paid down proportionately if still combined, which is not in your best interests.
Debt management is an important aspect of investment.
Try and have debt only on income-producing assets to ensure your tax deductions can be claimed, the cost of personal debt is minimised to improve your overall finances after tax cash flow and your personal living costs are reduced.
Whenever you withdraw available loan funds or increase debt on a property you own, you should be mindful of the use and tax consequences in both the short and long term.
The Australian Tax Office is very vigilant in tracking these claims, so be careful not to claim more than you are entitled to.
Steve Douglas is the Co-Founder and Managing Director of Australasian Taxation Services (ATS). ATS provides specialist taxation services for anyone looking to invest in Australian property, including Australian expatriates living overseas. Areas of specialisation include the Australian taxation aspects of property investment, as well as expatriate and migration planning. Find out more here.
From The Finder, February 2017
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