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Trust Loan - Extra Repayments

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Hi ATO,

 

I just got off the phone from my accountant and looks like I've done something which means I can't claim our trust interest on an investment property and need advise.

 

Can I confirm this is correct in this scenario:

 

Trust has a loan with a bank for an investment property

Individual trustee loans the trust a sum of money to put against the bank loan to assist with reducing interest payable

Trust redraws the bank loan and pays back the loan to the trustee

Accountant now is saying any interest on the investment loan is now not claimable as a tax deduction

 

What can be done in this scenario to ensure the investment property interest can be claimed as a tax deduction again?

 

This was unintentional and was trying to help out as mentioned in reducing the interest the trust paid. I obviously want to do the right thing from the ATO perspective but the interest we are being charged now on the bank loan is a legitimate trust expense as part of earning the rental income.

 

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Hi @skeys

 

Welcome to our Community.

 

It is likely that the advice provided by your accountant is correct. There are rules around what rental property interest expenses you can claim as a deduction. They are likely referring to Taxation Ruling TR 2000/2 which you can access from our legal database.

 

This ruling talks about the deductibility of interest on moneys drawn down under line of credit facilities and redraw facilities. From what you have described, it sounds like this ruling applies to your scenario. Pay particular attention to paragraphs 9 to 11 and 22 to 25.

 

Redraw facilities allow borrowers to make additional payments over and above the minimum payments required under the loan agreement, and then redraw them at a later time. This has the effect of reducing the interest payable.

 

Whether you can claim a deduction for the interest charged on the redrawn funds depends on the purpose of the redraw. Where the original borrowing was for income producing purposes but the redrawn funds are used for non-income producing purposes, the interest attributable to those redrawn funds won't be deductible.

 

If this is what has happened (which it sounds like it has), you will need to apportion your trust's interest calculation. For guidance on how to do that, refer to the interest expenses section of the rental expenses you can claim now page on our website.

 

For more information, we have a great guide called Rental properties 2019 that you can download as well.

 

You may also find the following threads useful:

 

Hope this helps.

 

Thanks,

 

ChrisR

1 REPLY 1
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Most helpful response

Community Support

Replies 0

Hi @skeys

 

Welcome to our Community.

 

It is likely that the advice provided by your accountant is correct. There are rules around what rental property interest expenses you can claim as a deduction. They are likely referring to Taxation Ruling TR 2000/2 which you can access from our legal database.

 

This ruling talks about the deductibility of interest on moneys drawn down under line of credit facilities and redraw facilities. From what you have described, it sounds like this ruling applies to your scenario. Pay particular attention to paragraphs 9 to 11 and 22 to 25.

 

Redraw facilities allow borrowers to make additional payments over and above the minimum payments required under the loan agreement, and then redraw them at a later time. This has the effect of reducing the interest payable.

 

Whether you can claim a deduction for the interest charged on the redrawn funds depends on the purpose of the redraw. Where the original borrowing was for income producing purposes but the redrawn funds are used for non-income producing purposes, the interest attributable to those redrawn funds won't be deductible.

 

If this is what has happened (which it sounds like it has), you will need to apportion your trust's interest calculation. For guidance on how to do that, refer to the interest expenses section of the rental expenses you can claim now page on our website.

 

For more information, we have a great guide called Rental properties 2019 that you can download as well.

 

You may also find the following threads useful:

 

Hope this helps.

 

Thanks,

 

ChrisR