If you have an investment loan and some spare cash, you might consider pre-paying interest to bring forward your tax deductions.
Basically, if you pay all of next year's interest in June (which will be here before we know it) you may claim the entire amount of interest in this year's tax return.
When would you do this?
- You'll earn less next year than this: If you're in the top tax bracket this year and believe that next year your income will be less, dropping your top marginal rate of tax, you might want to claim now so you get the better tax refund (speak to your accountant about what it might mean in dollar terms) OR
- Tax cuts are going to come into effect next year: rather than wait and get a refund at the lower tax rate, claim the interest expense now and get the better refund.
Check out the ATO's Rental Properties publication to confirm their view of your individual situation.
The interest rate is fixed for at least one year, although it's possible to opt for a longer term fixed rate (say 3 years). Just make sure you will have the cash flow available every year to pre-pay the interest. What you don't want is to find you can't pay it next year as you would have to break the fixed rate loan term, which can incur hefty costs.
The best bet is to talk to your accountant about the concept NOW so you can plan accordingly. If it's a good idea in principle, then speak to your mortgage broker (or us) to find out if your current lender offers this option and/or if there's a better deal available elsewhere. It's still a very competitive market out there for loans; you might just save some cash as well as get a bigger tax refund. But you need to get moving - if you do need to arrange a new loan for this purpose, allow enough time for it to be processed before 30th June - please!. (It's not a great idea to make the decision on the 15th June as it's unlikely it will happen in time and then you're just paying all your interest upfront with no benefit.)
If you'd like to talk about it some more, feel free to get in touch with us. We'd be happy to help.
