Deferrals of Interest Due to COVID-19

Deferral of Interest

 

November 16, 2020 | Warren Kruger | No Comments | ,

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).

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).

DO YOU HAVE QUESTIONS ABOUT THIS BLOG TOPIC?

CALL (08) 9248 8124 NOW OR SIMPLY FILL IN THE FORM BELOW

"*" indicates required fields

This field is for validation purposes and should be left unchanged.

Related

Warren Kruger

Specialist Tax Consultant - “Helping YOU Pay The Correct Tax And Not A Penny More”. My story starts on Christmas Eve, back in 1983 in South Africa.

Leave a Comment

Your email address will not be published. Required fields are marked *

Need Help With

Your Tax Return?

Complete the form below for a fast response

Scroll to Top
Call Now Button