A well-structured investment loan will build wealth and save you tax.

Most investors when acquiring an investment property or share portfolio will take a standard investment loan which includes an interest only component. When applying for their investment loan they do not look much beyond the interest only factor. Most accountants and financial planners will recommend an investment loan be taken on an interest only basis because by doing so an investor can claim the same amount of interest each year (the principal amount of the investment loan is not reducing) and save his personal income for a further investment in the future.

Recent tax rulings in Australia (both Private and Public) have confirmed that the ATO will allow for capitalised interest to be deducted when it is accruing on an investment loan or line of credit and being utilised to meet the shortfall in interest on an investment loan or the costs of maintenance and the like on an investment property.

The ATO had an issue in the past where some borrowers structured their investment loan as a package with their home loan debt and under the terms of the investment loan were able to capitalise the interest repayments on the investment loan provided they made an equivalent payment to the reduction of their home loan debt. This enable borrowers to repay their non-deductible home loan very quickly while at the same time enjoy additional tax benefits because of the increased interest accruing on their investment loan. The High Court of Australia eventually decided against this product and held that it was caught by Part IVA of the Income Tax and Assessment Act.

Subsequently other loan products have been developed on which Private Tax Rulings have issued which allow the taxpayer to claim the capitalised interest where he or she has either:
1. claimed the shortfall between the rental income received on an investment property and the costs associated with an income-producing investment including the interest paid on an investment loan. The ATO does not expect a taxpayer to use personal income to subsidise the costs of an investment loan.
OR
2. claimed the capitalised interest on an investment loan or investment line of credit where the terms of the investment loan or line of credit allow interest to capitalise because the investment loan secured against a different property in which the investor has sufficient equity to allow for the capitalisation.

Any investor who is considering an investment loan should ensure that the structure of the investment loan and any other personal debt is such that it will allow him to

1. Save his personal income for personal use (be it a holiday or perhaps the wiser move of making greater loan repayments to his non-deductible home loan debt so this is paid off much quicker.
2. By creating greater equity in his home property he is able to access this equity to arrange an investment loan for further investment and capital gains opportunities.
3. Increase his tax deductible interest which in turn will reduce the actual tax payable on his personal income.
Structure your investment loan properly and you will build your wealth much faster.

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loan even with other personal debt.