TAX Q&A: Your questions on property loans answered

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Our tax experts are on hand to answer any tax queries you may have regarding your property investments and wealth creation strategies. Email

Q: “I have all of my savings in an off set account against my investment property loan. I've used an amount (just under $50k) of those savings to pay a deposit and other costs to buy my second investment property. Obviously, I no longer get the benefit of reducing my first investment mortgage by that 
$50k amount. However, my friend told me I can claim a tax deduction of this equivalent off set 'loss' because I took the deposit from an investment property account. Is this correct? My mortgage interest rate is 5%, so this would give me an annual tax deduction of almost $2,500 – I hope he is right!”  – Jonathan

A: Congratulations on having the foresight to have set up an offset account that is attached to your investment property loan, because your situation is precisely one in which an offset account could provide a tax benefit. 

When you withdrew funds from the offset account, regardless of how the funds were actually applied (eg for private purposes, for purchasing an income-producing asset, etc), the ‘offset loss’, being the interest on the $50,000 that is no longer providing you with an interest offset benefit, became tax deductible. This is because the offset account has never disturbed the original purpose of the investment loan. 

Therefore your friend is right and I hope this has put your mind at ease!

“When you withdrew funds from the offset account ... the ‘offset loss’, being the interest on the $50,000 that is no longer providing you with an interest offset benefit, became tax deductible”



Q: I bought a property in 2008 as my own home. In 2012 I renovated it before moving out and putting it on the rental market. I have recently become more interested in investing and learnt about depreciation, so I’ve just had a depreciation schedule done this year – but is there anything I can do about all the years that I’ve missed out on this deduction? – Ronald

A: Unfortunately, you may have missed out on some of the available deductions, but that would depend on what date your last tax return was lodged. 

However, there are some ways in which you can minimise the amount you will miss out on.

Firstly, it is important to note that while a depreciation schedule will always start from the settlement date – in your case, somewhere in 2008 –you are unable to claim depreciation benefits for the years when your property was your principal place of residence.

Secondly, as your depreciation schedule would show, you are entitled to claim the applicable depreciation deductions on items associated with your renovation from the date when the property became income-generating. 
Some common renovation projects include items that will provide depreciation benefits for between five and eight years (and potentially up to 40 years!). 

Even though you’ve left it for four years, there may still be four years of deductions related to the renovation that you can claim.

So, what can be done to minimise the amount of deductions you miss out on?

• Amend prior tax lodgements 

For individuals and small businesses, the ATO will allow you to amend previously submitted tax returns. While there is a time limit of generally two years to lodge an amendment with the ATO, it potentially means you can minimise the depreciation benefit you have missed out on by retrospectively claiming from 2013/14 instead of starting to claim from 2015/16, as you have only recently had a depreciation schedule prepared.

• Choose the most appropriate method of depreciation calculation 

Provided that you have not already begun claiming depreciation via 
the Diminishing Value method of depreciation calculation, another opportunity may exist to assist in minimising the amount of depreciation benefit you miss out on. There are two methods of calculating depreciation accepted by the ATO: the Diminishing Value method and the Prime Cost method.

The Diminishing Value method weights the bulk of your eligible depreciation deductions in the first few years after settlement, with the value decreasing exponentially after that. The Prime Cost method averages out your depreciation entitlement over the eligible time period. 

As you cannot claim depreciation for the years when you were living in the property and have only recently procured a depreciation schedule, you would want to claim under the method of calculation that reduces the amount of depreciation allocated to the earlier years, ie the years you cannot claim for. In this case you would use the  Prime Cost method.

Once you have started claiming under one method, you must continue with this method for the duration of your ownership of the property.

“While there is a time limit of generally two years to lodge an amendment with the ATO, it potentially means you can minimise the depreciation benefit you have missed out on”



Q: In 2010, I bought a house for my mum to live in as she lost everything during the GFC. She has been renting it from me for $400 per week ever since. It would probably rent for $550 on the open market now, but I feel there are other considerations (like no vacancies and no property management fees) that make it worthwhile financially. Recently, a friend told me that because I am “under-renting” it to my mother, the tax office could actually deny my property claims! Is this true? –Rachel

A: For expenses to be allowable as income tax deductions, one of the key criteria is that the losses and outgoings must have been incurred in connection with gaining or producing assessable income. 

With rent-producing properties in circumstances where a property is rented to relative(s), and per ATO Taxation Ruling IT 2167 par. 13, “the essential question for decision is whether the arrangements are consistent with normal commercial practices in this area”.

If the rent is at the market rate, the investment property is treated no differently than any other investment property that is let out at arm’s length commercial rates – and all eligible expenses incurred on the property will be allowable as income tax deductions.

If the property is rented out to relative(s) at less than the commercial rent, the general rule of thumb and view of the ATO is that rental deductions will only be available up to the extent of the assessable income earned (that is to say that no negative gearing would be possible on the property).

It is important to note though that there have also been recent Tribunal decisions that have been favourable to the taxpayer. In the case of Bocaz v FC of T* the taxpayer rented out one of their properties to a related party at less than commercial rates but had an agreement in place that the tenant would undertake all repairs and renovations where necessary. The property was dated and the tenant did undertake restorations on the property. 

This additional arrangement in effect raised the rent being received by the taxpayer to an acceptable commercial level, and the taxpayer was successful 
at Tribunal in having the expenses incurred on that property during the period specifi ed as allowable income tax deductions (the total amount of expenses being greater than the income received).

As the above Tribunal case illustrates, the unique facts of each case always have to be considered and will impact on the final outcome. 

“The unique facts of each case always have to be considered and will impact on the final outcome”



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