By James Kirby – The Australian
Doing this year’s tax returns is going to come with a twist for many residential property investors: They will be claiming interest on loans on which they have not paid a cent in recent months.
Since March 20 this year, property owners who faced crisis related difficulties such as tenants not paying rent did not have to pay banks their ongoing interest bills. Rather, they could defer those payments until after September 20.
It is estimated that at least one third of all “deferred” mortgages in the system are related to investors rather than owner occupiers (In the last official count three months ago, the system-wide total of deferred mortgages was $165 billion).
In short, the pandemic crisis and the government’s parallel banning of evictions meant the traditional dynamics of property owner and tenant were turned upside down in FY20.
It’s what you might call the accidental capitalisation of interest in the residential property sector and it’s going to have major ramifications, obviously for the banks – in terms of defaults and impairments – but less obviously for everyday investors who may not be used to being able to defer anything when it comes to the ATO.
The ATO has made an exception and allowed investors to claim the unpaid interest as it does not cross anti-avoidance rules.
Deferred, not deleted
But advisers are warning not to see the ATO allowance as a gift but rather a chance to build a buffer for more difficult days ahead when the accumulated interest bills become due – in an environment where property prices are softening.
“It’s a useful development and there is the principle there already in business ownership that you can claim interest due. But the issue for residential investors is not to spend it. This is the chance to build your cash buffer. That’s what you need to do,” says Andrew Zbik at CreationWealth.
The problem is the payments are deferred and not deleted.
Typically, under the terms of the capitalisation agreements, the banks have done with property owners, the bank insists the interest is recouped within the life of the loan.
In other words, if there was $100,000 left on the mortgage and ten years still to go in March, then in September there will be $100,000 left on the mortgage and 9 and a half years to go.
In fact, that’s the best case scenario. Banks simply add what is owed to the bill and do not consider enforcing interest on interest.
Stuart Wemyss at ProSolution Private Clients says: “It’s a one off situation and hopefully all of the banks will simply charge an accumulated interest bill. Some banks have already made it clear they will not be charging interest on interest – but others have not yet ruled it out.”
The numbers of mortgage deferrals vary bank to bank. NAB reported that as of May 22 it had approved 98,874 home loan deferrals with a balance of $39bn. In common with all of the banks, NAB told the Senate Economics Committee it has recently been in contact with its mortgage-deferring customers as it seeks to “gain a deeper understanding of their situation”.
The possibility of residential property investors claiming interest due – but yet unpaid – on their annual tax bill has effectively been terminated in recent years after a series of court actions known as the Hart case that occurred more than a decade ago when the ATO clarified its stance on the issue.
This article by James Kirby appeared in The Australian on 1st July 2020