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Another Loan Contamination Question

Discussion in 'Accounting & Tax' started by Wonka, 2nd Jul, 2015.

  1. Wonka

    Wonka New Member

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    First of all, apologies in advanced as I know this forum gets a LOT of "have I contaminated my loan" questions.

    Secondly, great to see the new property chat forum off to a great start

    I hoping to get some guidance from you gurus please regarding an offset and potential contamination.

    My Scenario:

    Loan Structure
    I have a 100k loan that was used for investment purposes. These loan funds were 100% used for the purpose of deposits for investment properties and/or investment related fees (eg. investment insurance, conveyancing fees, B&P etc). This loan is against my PPOR and I claim a tax deduction on this loan. (Although there is an offset linked, i don't use it. The borrowed funds were put back into the loan and re-drawn to pay investment related activities).

    I have a second loan account - $200k also against my PPOR. I also have $200k sitting in the offset account so interest is $0. I've kept the $200k in the offset to give me options - ie when I move out of my PPOR I can choose to convert it to an IP whilst using the $200k in the offset for my new PPOR.

    Situation
    I have found I have almost exhausted my $100k funds and I need more (for investment purposes). I'd like to payout the $100k with my $200k whilst keeping 100% tax deductibility.

    Options
    Can I do this, whilst keeping my options open in case I want to buy a new PPOR and change my current PPOR to an IP?

    That is - can I do the following:
    1/ Take the $200k in my offset, and put it in the $100k offset. Claim the interest on my new $200k loan and in the future if I decide to convert my PPOR to IP, I can withdraw the $100k and still have it tax deductible?

    or

    2/ Pay out the $200 from my offset into the $200k loan (ie effectively $0 owing). Then take the required funds and pay out the $100k loan. But in this case I would think I'd lose the ability to use these funds for a new PPOR AND have it tax deductible.


    *confused*

    Thanks
     
  2. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    Option 1 doesn't work, moving money around offset accounts doesn't change the purpose of what the money was borrowed for, so it doesn't make the $200k loan deductible (I'm assuming the original purpose also wasn't deductible).

    Option 2 works because you've now paid off all your non-deductible debt. You then borrow the money back for more deposits, which is a deductible purpose.

    A third option would be to set up another equity loan or to increase the existing $100k loan and use the money released for investment purposes.
     
  3. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    No matter how you move the money around, you can't use borrowed funds for a PPOR and claim them as a deduction.
     
  4. Wonka

    Wonka New Member

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    Thanks All.

    I understood that if one day i wanted to convert my PPOR to an IP, I could withdraw the $200k in my offset and put it towards my new PPOR, and have the $200k loan tax deductible (because it was against my old PPOR which is now an IP). <--- or am I mistaken :S

    I wanted to try to retain this option ... if possible - in my above scenario
     
  5. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    You're mistaken unfortunately. :(
    Its what the funds are used for, not what secures them that determines deductibility.
     
  6. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    If you remove $200k from your offset you will start to incur non deductible interest. This interest would only be deductible once you move out.

    Why not just set up a new LOC to access funds to invest?
     
  7. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    Just to be clear - is the $200k sitting in the offset account money you saved ie your own cash, or is it the $200k you borrowed which was put into directly into the offset?

    I assumed the latter?
     
  8. Wonka

    Wonka New Member

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    No, the $200k was savings we had. So when we took out a loan, we put $200k cash into the offset (ie our own savings, not the borrowed funds). Intention was if we moved out and made it an IP, I can take the $200k (savings) and put it into the new PPOR.

    So I guess what I'm asking... is do I have a scenario where I can "transfer" the investment debt from my $100k account to my $200k account, whilst having the option of converting my PPOR to IP later on. (and taking any available funds with me .. namely the $100k) ....
     
  9. Wonka

    Wonka New Member

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    Thanks Peter,
    3rd Option is hard for me because my serviceability is pretty slim at the moment.
    What I'd like, is to take up option 2 whilst ensuring I can still take some money with me when I convert my existing PPOR to IP and buy a new PPOR (whilst maintaining tax deductibility). Is this scenario an option ?
     
  10. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    That is an option. Looking over the last few posts, I think there's a good chance that there's some misinterpretations regarding your loan structure and history. Probably the best thing to do is to get some specialist advice via a direct converstation. Trying to solve this via a general discussion is probably more likely to mess things than to really help. Please approach one of the brokers from the forum, there are several great ones in Sydney.