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                                    $33,697

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 first seek professional advice to determine if your circumstances satisfy all requirements. Don’t leave it until next June – start planning now.   

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The information provided in this article does not constitute specific advice. For further information , you should contact your professional adviser.