I am sure that many of us were watching the news this week anxiously hoping the RBA would not increase interest rates again, but as widely anticipated the case rate was raised another 0.25% to 4.35%, making a total increase of 4.1% in just 18 months.
Many homeowners and property investors will be really feeling the pinch now and I am sure considering trying to reduce the cost of their borrowings by seeking to renegotiate or consolidate loans.
In doing so, care needs to be taken not to create a tax problem. ATO has had mortgage interest claims against rental income on hot topic list for the last 3 years and as a result the rental schedule is often the focus of an ATO audit or other investigation.
A reminder that only interest relating to the purchase of a particular rental property or its upkeep and maintenance can be claimed as a deduction against the rental income on that property. So, it is vital that separation can be made.
Consolidation of loans:
Where the mortgages of more than one investment property, or worse an investment property and the taxpayer’s home, are grouped into a single loan can be problematic, a ATO want to see a clear division of the interest for each investment property and segregation of investment property interest from that on the taxpayer’s home, which is not tax-deductible.
Drawdowns:
Where a drawdown is taken on an investment property mortgage and used for something other than the investment property, for example to refurbish the taxpayer’s home, repair a car, pay for a holiday, the interest relating to that drawdown needs to be segregated from the interest claimed as a deduction on the investment property.
This need to segregate funds used for different purposes is not confined to rental property, it relates to all investment funding.
So, when renegotiating your financial arrangements, don’t forget the tax impacts and contact your Fairway team for advice on how to ensure you haven’t compromised your tax position.
