How to: Save tax by prepaying interest
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:
Salary income $110,000
Rental income $23,400
Gross income $133,400
Prepaid interest ($320,000 at 4.5%pa) $14,400
Assessable income $119,000
Tax on gross income $39,523
Tax on assessable income $33,697
Tax saving due to prepaying interest $5,826
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 don't do it without professional advice to determine if your circumstances satisfy all requirements.
As licensed financial planners we can advise you on strategies like this to save tax. Book a free consult today to see if we're able to help you.
Disclaimer: Any information contained in this content is of a general nature only and not intended to be advice of any nature. Further details here.