Saving tax by paying 12 months interest in advance on an investment loan

Paying the interest on an investment loan in advance for the following financial year could enable you to enjoy a larger income tax deduction this financial year.

This is because you are able to claim the interest as a tax deduction this financial year, even if the interest is for servicing the loan in the following financial year.

It is important to remember however that your will not receive a deduction in the following year unless you again pre-pay interest.

An example of where this might be appropriate:

Paul (age 40) earns $70,000 per year and is using a gearing strategy to invest as part of his long-term retirement planning. He takes out an investment loan for $100,000 at a rate of 7.5%.

He pays 12 months interest in advance and can deduct this from his income tax for the current financial year. His taxable income is reduced from $70,000 to $62,500 and his tax bill is reduced by $2,362.

To be even more effective, Paul could then use this additional tax refund to reduce his non-deductible personal debt.