Tax issues with mixed purpose loans tipped to rise this year: Hayes Knight
A recent spike in property transactions and refinancing deals is seeing taxpayers increasingly fall into tax traps with mixed purpose loans, warns Hayes Knight.
A higher volume of property transactions, refinancing and mixed purpose property loans is likely to see a further increase in errors being made with deductions for properties, according to Hayes Knight director Ray Itaoui.
Mr Itaoui said he is seeing increased levels of refinancing, investment and people selling or refinancing their main residence to buy an investment property.
“What I’m starting to see come through in a lot of tax returns is a lot of mixed purpose loans where an investor wants to buy an investment property and they withdraw half a million dollars from their home to buy it,” he said.
“That amount is not actually deductible in the tax return because it came from the main residence, and it can’t be turned into deductible interest. It becomes a mixed purpose loan where part of it is deductible and part of it isn’t.”
With the uptick in property transactions and refinancing deals, Mr Itaoui said many taxpayers are losing track of of what is deductible and what isn’t with these mixed loans.
“This is now a focus area for the ATO and we’ve already had some questions coming through from the Tax Office on this,” he said.
Mr Itaoui said while lenders and finance brokers are focused on getting the right outcome for clients, they are usually not concerned with the tax treatment of these loans.
“They’re not accountants or financial advisors so they’re not thinking about the tax implications, so unless the individual borrower is across these tax implications or the accountant is across the details before the loans are refinanced, it can be difficult to try and piece it together,” he said.
“So, many of these investors are ending up in a situation where they are over claiming on the deductible interest on their tax returns. The Tax Office now have complex data matching programs in place and if they were to question or pick up on this, it would be a bit of a surprise [for those investors].”
While property has always been an issue, Mr Itaoui said he expects this will only worsen over the next couple of years as borrowers adjust to higher borrowing costs.
Mr Itaoui said with more people looking to rent out rooms in their homes with rising mortgage repayments and cost of living, accountants also need to ensure clients are aware about the tax implications.
“If you’re selling a house that you’re claiming as your main residence, then there will be no capital gains. However, if you’ve had somebody rent out a room for a while then that will change the calculation and how the gains are treated,” he said.
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