Bank account set for first IP

I am a first time inverter and used following loan setup to but my IP.

POPR (home) Loan Account - POPR
Offset for POPR Account - OFF_POPR

Equity release loan Account to Purchase IP (variable) - EQ_RELEASE
Offset for Equity release loan Account - OFF_EQ_RELEASE

IP loan account (variable) - IP_ACC
Offset for IP - OFF_IP

Lets say Equity release loan is 150K which was approved (funds available in the bank) before I start the process.

Paid initial deposit for the buyers agent from OFF_POPR account. (2k)
Paid deposit for IP from OFF_POPR - 5k
Paid remainder for buyers agent from OFF_POPR - 9k

Borrowed 80% of 400K IP from bank (IP_ACC above) and used EQ_RELEASE to pay for the remaining 20% + settlement fees (80k + 5k = 85K). Let the remainder of the OFF_EQ_RELEASE (150K - 85K = 65K) sit in the OFF_EQ_RELEASE.

Then transfer 5k from OFF_EQ_RELEASE to OFF_POPR which I earlier (above) used for the deposit.
Then transfer 11k (total buyers agent fee ) from OFF_EQ_RELEASE to OFF_POPR

Therefore the new balance of the OFF_EQ_RELEASE = 65K - 5k - 11k = 49K

Also, I have setup direct debits for Council rate/water to come out from OFF_EQ_RELEASE.

Plan is to use total interest of EQ_RELEASE and IP_ACC as interest expenses for IP

Can anyone please let me know whether there are any issues in the way I have setup accounts and transactions for the tax purposes?

 

Its very confusing they way you have written.

Yes there are tax issues from what I can gather.

See my tax tip 1

 

Thanks Terry for your reply. I read your tax tip1 and most of the subsequent posts regarding the same. While reading those I got the following question, which is much more important than the earlier one.

My loan setup is as follows.

MY HOMELOAN
1. I have variable loan account and lets call it "POPR_LOAN"
2. I have an offset account for the above and lets call it "OFFSET_POPR_LOAN"

Then I have decided to get an equity release loan from my home loan above as separate loan to invest in a property.

I have request 150K for the equity release loan and bank approved it put the funds into the offset of my POPR ("OFFSET_POPR_LOAN"). As soon as I realised (One day after) bank has deposited funds into my "OFFSET_POPR_LOAN", I have moved it to the offset account of the Equity release loan (Lets call it "OFFSET_EQUITY_RELEASE"). Later on I have used funds in the "OFFSET_EQUITY_RELEASE" to pay for 20% of the IP, legal fees, etc (EFT by the solicitor)

There are few more transactions around it but I will keep them aside for the moment to keep it simple.

In this scenario, is my equity release loan considered contaminated for the tax purposes?

If so, is there a way to untangle it?

Cheers,

 

yep. contaminated.
I actually did a webinar on this and you can see it on my website. www.structuring.com.au I think

What you need to do is put it back into the loan and reborrow it making sure you don't contaminate it again.

 

Thanks Terry. I will read it.

Did you mean settle the current loan and get a brandnew loan?

 

No all you need to do is pay it down and redraw it making sure it doesn't automatically close when you pay it down

 

@Nad I'm guessing you're a software engineer or similar.

The reason your loan appears to be contaminated is because you moved funds from your home loan offset account to the equity loan offset account. What you probably should have done is moved the money into the redraw facility of the equity loan, then to its offset account.

That simple act means you've borrowed the money for the IP deposit and costs, rather than moved money through some savings accounts and then spent it. This can be an important distinction.

If you haven't settled the new purchase yet and spent all the money, you may still be able to salvage the situation somewhat. It would be best to get very specific advice on this.

 

Hi Terry,

Thanks. I have just listened to the webinar.

Unfortunately, this happened about 8 months ago and the property was settled 6 months ago.

Do I still have a way to work around this situation?

 

Hi Peter,

Thanks.
You guessed it right.

I didn't spend it from my home loan offset, rather I have directly moved it to equity release offset and use it from equity release offset to pay for IP expenses.

Unfortunately, this was settled 6 months ago didn't have clue about this issue. Do you see any way to recover from this?

 

That's exactly what I'm trying to say. You moved the money directly from one offset to another. What you should have done is taken a detour via the equity loan to effectively pay this off, then borrow the money back.

By borrowing the money back from the equity loan, you would have established that the money has been 'borrowed'. As the purpose of borrowing that money is for investment use, the loan would have had the potential to be tax deductible.

The problem is you haven't borrowed the money at all. An offset account is simply a savings account with an interesting feature. You've used money from a savings account to pay the deposit and costs. As there's no interest charged on a savings account, there's nothing in there that's tax deductible. The fact that this savings account offsets a home loan is pretty much irrelevant (you may be calling it an equity loan, but no equity appears to have been drawn from it).

 

Thanks. So, there is no way to recover from this mistake?

If that is the case, I might be better off paying off the equity release loan as opposed to my home loan as the equity release has much higher interest rate (as the purpose of the loan is to buy an IP)

 

I have described how to recover above

 

Hi Terry,

Sorry I got confused.
I thought your suggestion only valid before settlement?

If it is still valid after the settlement, it gets interesting as I have already spent the funds for the IP. Now I have to find enough funds equal to the balance of the equity release loan, put it back to the equity release loan and redraw back to the offset of the equity release loan. Does it sound right?

 

You need specific tax advice.

 

Blended loans are like playing three card/cup monte with the ATO. They always win and the other person thinks they have the correct answer.

 

Sure. Thanks for the help. Good to realise the mistakes now than 5 years later

 

Hi All,

I will be meeting up with the tax accountant to discuss about this matter soon. Last two day I have been reading lots of post regarding this and related matters in this forum.

From what I understood, I should still be able to work out a deductible percentage based on the money available in the "OFFSET_POPR_LOAN" when the bank transfer the funds of the equity release loan.

During the period where equity release loan funds held in "OFFSET_POPR_LOAN", there was very little personal funds available in it. As a percentage it will be well over 90%.

Is it correct if I say, in the worst case scenario, I should be able to deduct that percentage of bank interest of the equity release loan as an interest expense for the IP?

Thanks in advance.

 

If you can trace money used for investment fund to a loan the interest may be deductible in full or part. If you have mixed it along the way a percentage should still be deductible.

 

If you moved $$$ from loan to a offset and then it blended with other money in an offset and then drew $$$ out of the offset to invest it may either be very simple or very complex to work out the deductible %

The ATO considers a daily calculation may be required to continually determine the daily deductible %. So if few transactions occur its simple. If there are a large number the complexity is exponential and if you cant determine the % then the ATO would consider it also cant verify your % and deny all, some or most of the deduction. The onus is on the taxpayer to ensure it can satisfy the ATO at a future date. I have one on my desk now...Goes back to 2013 and the ATO want to review the loan for every day since it was first drawn.

The other issue of course is what the $$$ were used for. If you drew $90K and added this with 10K of savings so that (say) 90% was deductible use and it was used. You may even further complicate and now have a blended use as well as blended offset......... :

- $40K deposit on IP2
- $20K Telstra shares
- $20K of Tesla (USA) shares
- $20k remains in the offset

1. IP2 deposit interest portion is 90% x 50%... 45% of interest
2. Telstra shares pay a dividend so 90% x 25% deductible as a deduction v dividend income ....22.5% of interest and
3. Tesla shares dont pay dividends. This interest isnt deductible. 90% x 25% (22.5%) may add to the costbase of the Tesla shares to assist calculating future CGT profit / loss
4. 10% of interest is non-deductible as a private expense.

Now advance six months. Sell the Tesla and Telstra and buy CBA and what happens ?? Especially if the broker just cross trades and there is no new advance. Is the CBA portion even deductible ?

 

Nad,

You transferred the funds from your PPOR Offset into the Equity offset the day after the funds were deposited into the PPOR offset from the settlement of the cash out.

You're fine, there isn't a contamination or whatever everyone is calling it. You fixed it the next day and at that time, no interest would be accruing for you to tax deduct. Once you paid the deposit, drawing funds from the equity offset, interest would start accruing against the equity loan which you can tax deduct. The ATO looks at the purpose of the funds and it's clearly investment.