changing loan from investment loan to owner occupier loan

Hi Folks

Thanks in advance for your input on this.

My current scenario is that I have 2 loans that were set up entirely to fund an IP purchase a few years back. I took extra care to start with a clean slate and not have any mixed purpose loans, so the ppor loan was paid off and discharged before we started over as per below:

Loan 1 variable p&I with offset , secured against PPOR. Investment loan rate.

Loan 2 variable p&I , secured against IP. Also investment loan rate. Was originally fixed rate.

Now looking to refinance to benefit from new lenders lower rates , cashbacks etc keeping same structure.

Broker is suggesting to take a lower owner occupier rate on loan 1, since its secured against ppor anyway.

My question is, will this specifically jeopardise the tax deductibility of loan 1 if I do this? Am I falling foul of either the bank or taxman or is this some sort of grey area?


Cheers

 

What was the proceeds of loan 1 used for?

 

I should clarify. Both loans were used exclusively for the IP. Loan 1 initially was a Loc and covered the deposit and buying costs. It was then connverted to a lower variable loan. Loan 2 covered the balance of IP purchase.

 

The label that a lender puts on a loan does not affect its tax deductibility. It's what the money was used for that counts.

 

What the loan is called has NOTHING to do with tax. What you use the $$$ for is everything. eg It can be a owner occupied home loan and if the borrowing was used to buy a boat its non-deductible. It could be called an investment loan and used to buy clothes...Non deductible. Or owner occupied and used as a IP its likely deductible.

 

I did exactly what you are doing, bought a rental by taking out two loans (one on the rental, one on a paid-off PPOR). Mine was slightly more complicated as the PPOR was in two names but the IP only in one name, plus the PPOR loan had to be in both names due to servicability. Our PPOR loan was considered by the bank to be "owner occupied" right from the start, even though 100% of drawn funds went towards the IP.

We obtained a Private Binding Ruling from the Tax office and they said that 100% of the interest incurred would be tax deductible for the owner of the IP. They included the words...

Also, they specifically said that it didn't matter for tax purposes if a loan was in joint names, if someone else was paying into the loan, or even if the owner of the IP required a joint loan because they were unable to sevice the loan by themselves. (not that these appear to apply to you, it's just that they didn't seem to care about anything other than what the money was used for)

I should note that you cannot rely on someone else's PBR, you should obtain your own if you are concerned.

Also, once you have two loans with different interest rates, make sure to put any excess cash into the offset for the one with the higher rate.

 

Why would you need a BPR for that ? Its fundamential tax law. s8-1 ITAA 97.

 

- To convince my wife that she was wrong.
- To convince my wife that I wasn't dodgying up my tax estimates to make investing in property look better than it actually is.
- Because someone on another investment forum told me that I should get one in my situation.
- Because I'm not a tax guru like yourself and getting a PBR is a cheap (free) check that I haven't borked up my understanding of the law and cause me to be penalised later.
- Because I like trying new things and was curious to see how easy it was to do. (Answer - really easy!)

But the first one was the main reason.

 

Im not sure if your problem is tax related