Many lenders have recently allowed borrowers with investment property loans to defer repayments for a period of time.
While repayments are being deferred, interest (and fees) will usually be added to the loan balance (i.e., the deferred interest will be ‘capitalised’).
However, it is important to recognise in such situations that, while repayments are not being made during the relevant period, borrowers continue to ‘incur’ the interest during that time.
Further, interest will continue to be calculated and will accrue on both the unpaid principal sum of the loan and the unpaid (i.e., capitalised) interest. The interest that accrues on the unpaid or capitalised interest is referred to as ‘compound interest’.
Importantly, the ATO has previously acknowledged that, if the underlying, or ordinary, interest is deductible, then the compound interest will also be deductible.
Accordingly, interest expenses (including any compound interest) will generally be deductible to the extent the borrowed monies are used for income producing purposes (such as where the borrowed funds are used to purchase a rental property).
However, interest on a loan will not be deductible to the extent to which the borrowed funds are used for private purposes (e.g., to purchase a home, a private boat, or to pay for a holiday).
Editor: Note that, despite the name, “penalty interest” is not always “in the nature of interest” and, in some cases, may not be deductible (e.g., due to the expense being capital in nature).
If you are unsure how this will affect your business, Please Contact Our Office.
In times like this it’s always good to double check your retirement plan and investment structure. If you are unsure how this will affect your financial situation going forward, please contact our office and arrange a Complimentary Financial Health Check meeting with us.
Please Note: Many of the comments in this publication are general in nature and anyone intending to apply the information to practical circumstances should seek professional advice to independently verify their interpretation and the information’s applicability to their particular circumstances.