Over the years we’ve seen a number a clients who’ve utilised “Line of credit” type loans that associated with investment properties.
A line of credit is a facility that establishes a maximum loan balance that the bank will permit the borrower to maintain. The borrower can draw down on the line of credit at any time, as long as he or she does not exceed the maximum set in the agreement. Traditionally borrowers deposit all their income into this account then draw out funds as required.
So what’s the problem?
Say you used a line of credit to purchase an investment property. You then directed all your wages to this account. You then draw out money as required for your living costs. The ATO view is that each time you withdraw funds for personal use, that portion of the loan becomes non-deductible. Generally with other types of loans in this scenario the portion of the interest you can claim diminishes over time but is still tax deductible.
So although a line of credit may seem like a great option, it’s not always the most cost effective solution. Your accountant and financial planner can help you to find the best way to structure your loan for your situation.
Note: It is always prudent to keep a separation between loans that are private in nature and those for investments. Similar benefits can be obtained through the use of mortgage offset accounts.
by Scott Sharp
Scott is a Senior Accountant at Insight Accounting advice. He has a Bachelor of Commerce and is a registered tax agent. Scott’s experience covers all facets of accounting but he specialises in small businesses and SMSFs.
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The information in this document reflects our understanding of existing legislation, proposed legislation, rulings etc as at the date of issue. In some cases the information has been provided to us by third parties. While it is believed the information is accurate and reliable, this is not guaranteed in any way. Any advice in this publication is of a general nature only and has not been tailored to your personal circumstances. Please seek personal advice prior to acting on this information.