Calculating mixed loan when converting from PPOR to IP

Gday everybody, I think I may have made a monumental screw up a few years ago out of ignorance and now I'm trying to fix it. Any advice would be appreciated. Situation:

-3 years ago I purchased a house as PPOR with a P&I loan with offset account.
-2 years ago I refinanced to what I thought was a much better deal P&I WITHOUT an offset.
-Since then I have been putting all expenses onto my credit card and used the redraw facility to pay it off monthly.
-I also used the redraw to purchase $6000 of investment shares (no dividends, hoping for Capital gain)
-I am now moving and wish to rent the house out (Also if relevant I will be renting in the new location and do not have any other loans, ie I will still be paying this loan off asap).

I've just discovered TR 2000/2 and the whole "mixed/contaminated" loan problem.
I understand that I need to calculate the proportion of the loan that has been used for private uses and use this as a basis for the interest deduct-ability.

My plan to remedy this so far is to:
a) Calculate the proportion of the blended loan that was private use using one of the blended loan calculators from the beginning of the refinance (as before that no redraws were made)

b) Once calculated, create sub accounts in the loan to split the non-deductible from the deductible and then pay off the non-deductible first (if thats even possible)

c) Open 2 offset accounts, 1 as an everyday transaction account (salary in, credit card out etc)
and 2nd for all IP related items (rent in, rates out etc)

The questions I have are:
1. When calculating the blended loan are amounts that I have redrawn for rates/house insurance/water in the past (whilst still PPOR) deductible or non-deductible? Taking this further what about payments made (with receipts) for things like aircons and dishwashers that will become part of the IP?

2. How do I treat the redraw made to purchase the shares?

3. Will using the offset account for private uses create any further problems?

4. Is there a better way to tackle this?

Thank you for any help, wish I had known all this 2 years ago!

 

Hi,

It’s not that simple i’m afraid. Taking into account the original drawdown and all the redraws etc, you will also need to correctly aportion the interest charged since for each to each split as well. Go see a professional like an accountant and they will be able to work out what splits you need for personal spending and investment spending including your shares. Take all your records and statements etc with you. Also engage a good mortgage broker so you can get the splits setup correctly on that side of things as well.

Good that you have found out now and not down the road, it’s a problem that only gets worse with time.

Kassy

 

what a mess.

 

you say all of these expenses were on the credit card. how you going to work out the deductible portion relating to the credit card?

did you ONLY use the credit card for property related purchases. im guessing not.

yes you have made it a true nightmare.

@Paul@PFI might be able to do the calcs during the free consult

 

Bloody messy!

1. Private expenses

2. Non-deductible

3. Only if it contains borrowed money

4. Yes

 

Thanks for the replies, and yes @Terry_w it is a bloody mess but thank you for the answers. Any hints as to what that better way is?

@MikeLivingTheDream seeing as all credit card repayments were made while I was the owner occupier (and Terry has indicated that makes everything private expenses) then it is all non-deductible. At least that part is simple...

@Kassy I will, I talked to an accountant today but he was indicating he would need to know what was used for what with the redraws and had me confused on a few things hence the questions. Solid advice though thank you!

 

@James_isconfused

Its actually not that bad. The payments to the credit card wont be deductible doesnt matter what you used the credit card for. Could try apportioning the credir card but a total nightmare and domjans case would probably deny it.

So take out all the credit card payments and the share acquisition and you have the amount that relates to the ppor. Then apportion the repayments between the ppor and other.

 

Just work it out on a reasonable basis. I think bantacs has a spreadsheet for sale which helps and it is pretty cheap.

 

Thanks Terry, I've filled in the bantac spreadsheet for every transaction since the refinance. 55% business/deductible ouch!

I'll have another chat to the accountant tomorrow but just so I've got it straight in my head:
If I leave it as is and use an offset account from here on in (and don't redraw any more funds) then I can claim 55% of any interest paid whilst the house is acting as a rental.

OR better yet

I split the loan 55/45 and then pay off the 45 section asap whilst claiming interest on the 55 split.

Is that about the best I can make of a bad situation?

I really wish I had known about this when I was looking at refinancing, all this pain could have been avoided for a $200/year offset account!

 

No. Are you paying. I ve a blended loan calculator but this mess isnt within the scope. The use of the bantac resource is about as good as it can be. Its not unusual to find the diluted interest issue

 

Possibly. You need tax advice. All this could have been avoided by paying for some advice upfront.

 

Ok thanks will do. Yes it could have been, but you don't know what you don't know. I was purchasing my first house and got advice left right and centre, for all I know I was told this and it slipped through the cracks, now I just have to fix it. Thanks for the help.

 

the lesson for others. seek professional advice early. for certainty ask for the advice to be in writing.

it wont be as cheap as scouring forums or calling 10 different accountants plus the ATO but any accountant who puts advice in writing will think twice before doing so.

in this case it would have saved you thousands or possibly tens of thousands over the next 5 to 10 years.