Most investors and business owners are aware that the interest paid on an investment loan is generally tax deductible. These deductions can be maximised by prepaying the interest on the loan.
To do this contact your financial institution and arrange to have all of the interest costs for the following financial year brought forward and paid during the current year. You may then be able to claim these costs as a tax deduction in the current financial year.
The advantages could be considerable as the following example shows:
Phillip earns an annual salary of $110,000 and owns a rental property that generates an additional income of $23,400 each year. Phillip currently owes $320,000 on the property, with an interest rate of 4.5% per year on the loan. Assuming no other tax deductions, the impact of prepaying interest on Phillip’s assessable income is as follows:
Income
Salary income $110,000
Rental income $23,400
Gross income $133,400
Less deductions
Prepaid interest ($320,000 at 4.5%pa) $14,400
Assessable income $119,000
Tax on gross income $39,523
Tax on assessable income $33,907
Tax saving due to prepaying interest $ 5,616
Prepaying the interest on your investment can bring forward related tax deductions this financial year. It may also enable you to fix the rate on your loan for 12 months and in so doing, could attract a lower interest rate.
Other conditions apply to claiming a deduction on prepaid interest, so first seek professional advice to determine if your circumstances satisfy all requirements. Don’t leave it until next June – start planning now.