Confused on structure and process

Hi all,

I'm completing a refinance and my loan structure is

1) Home loan 300k
2) Investment loan 50k
3) Investment loan 50k

40k (from equity, is going to be paid into a transaction account for investment eventually).

How do I actually use the investment loans to make them tax deductible? Do I pay off the investment loans, then redraw?

 

Have you sought tax advice?

How are you receiving $40k equity when you have no 40k split?

If you pay off investment loans you lose deductibility

 

It's a refinance.

I think it's just a completely new loan with new accounts.

In the form, it asks where it should send any excess money.

How do I know if it's a split?

 

The loan amount should be listed if they are split. Who is advising you on this?

 

Uber (can't afford the taxi fare).

 

what did the loan look like before you refinanced?

 

My tax accountant is advising however I no longer have confidence in him. He hasn't provided me the clarity through the process. I am looking for someone else to validate the structure. If anyone here is able to provide the advice I'm happy to pay for the advice.

For simplicity I've used rounded numbers.

Before refinance.
350k home loan as owner occupied offset. It has a couple of offset accounts attached.
50k in offset.

Property was revalued at 400k.

Refinance structure
300k home loan
50k investment split
50k investment split.

I requested from my broker a "investment split".

When I got my papers back it looked like 3 separate loans (as above). I don't know what an investment split actually looks like? Ie should it say split or just a separate loan.

I nominated a transaction account to deposit the additional funds in which will be used to invest in shares.

EDIT: my broker sent a screenshot of what was requested to Macquarie Bank. It says

Product 1: variable owner occupied (300k
Product 2: variable investment (50k)
Product 3: variable investment (50k)

 

It doesn't matter what the loan is called but how you use the funds.

It sounds like you have converted $50k of the loan to investment rates unnecessarily. This won't change deductibility but you will pay a higher interest rate.

If you get the borrowed funds placed into a transaction account with other cash you will have a mixed loan to worry about too.

 

The interest rates are the same for all accounts. Still lower than before refinancing. (I must've been on a terrible rate before hand)

Made a mistake. The account the actual funds are going in is my savings account not transaction. The savings account is heavily used to transfer between savings and transaction. If I move my savings to another account (show the balance is 0) would that be enough to show it as a separate account and ensure loan is unmixed?

 

Is the total lending $400k against a property worth $400k?

If so, this is a 100% LVR. For any lender to make this work, the property would need to be cross collateralised with another property for this to work.

I'm probably missing something here...

 

You are right. My mistake. Property valued at 500k. The loan is 80% of the property value. No collateralizarion is involved.

 

That would mean an unsecured loan. No crossing of securities - there is one security for each loan.

 

That would help in the short term. Or clean the loan up later by paying the money back into the loan before using to remove any contamination.

 

Firstly, a loan isnt a structure. However how you "structure" your borrowing and how its implemented is a key TAX issue. That actually may beyond many advsers since YOU (maybe through a third party eg soliictor, bank etc) will initiate the loan proceeds to be used. They may not influence or know what you are actually doing. And some tax advisers really dont understand the fine points

An investment split means a clear new account for the extra $50K that way the specific drawn down and then USE of that borrowed money is for a precise (new) purpose and seperate to that of the refinanced loan (eg a existing property) or any other borrowed amount. This isolates its interest from that of other purposes. eg You can now focus on paying down loan1 NOT 2 or 3 if they are deductible. Loan 1 could have a offset. From the splits shown that seems to have been done to create proper splits. However how the proceeds are discharged and then used will be a further step needing some advice to avoid concerns. Your comment I highlighted in BOLD is a problem. I can tell you that now.

Most lenders will just advance the 2 x $50K and dump it into a savings account. It will affcet deductibility. It can be fixed. NOW !! And mixing $50K from L2 and another $50K for L2 which are two different uses is also a problem. Taking money from a savings is NOT a use of borrowed money. Even if the original source was from a borrowing.

1. Ask your broker if you have redraw on L2 and L3.
2. Ask your broker is you can FULLY repay the $50k amounts (or maybe $49,999) and draw it out later without any issues (do that by email !)
If so a strategy to repay it and reborrow and then use the borrowing directly without blending with ANY OTHER $$$ may be the approach. Check first.

Example of te concern... Fred borrows $50K from loan 1 to buy shares. He also borrows $50K from loan 2 to buya future IP. His lender puts $100K into a savings account.
1. The interest on loan 1 and 2 are NOT deductible and never will be. The use of the borrowed funds was to put into savings. It doesnt produce income. Snap
2.Loan 1 is incurring interest when it may be wise to hold that 50k in a offset linked to loan 1. That stops interest unmtil the offset is cleared when used to buy shares BUIT dont do that through a avings account. (It blends the use with other funds as well as affecting the borrowed money principle.
3. Loan 2 should also have a offset so loan 1 and loan 2 proceeds remain unblended from each other OR if you are able just repay and later redarw it when needed. LOCs are better for this but may cost more. Two offset accounts (one per loan) may be needed.

 

Loan splits and use.need three clear defined events to each be correct to be a solid well structured loan
1. Loan splits for each "use"; and
2. Initial advance of the split cant blend with other funds and should NEVER go to a savings account or offset with other $$$; and
3. When the advanced sum in 2. is "used" it should all be directly used for a deductible purpose without blending or passing through accounts which impact a USE of the borrowed money.

Question : I am often asked why is a borrowing all deductible if it is paid to a solicitor / conveyancer/ real estate trust account and it is going to mingle with other peoples money ? What make it a problem for me? My accountant used that example and says I am being pedantic.

Answer. They are wrong. Your money and other peoples money arent co-mingled when held on trust. You money is held as your money under common law concepts. Its like a bank. It has accounts. It has one big pot of cash but your money is accounted for as yours on a account by account basis. Your tax adviser lacks understanding and isnt considering the basic deductibility principle in tax law. The interest isnt "incurred" 100% in producing assessable income if it cant be demonstarted it is directly USED in full to produce assessable income. When it passes through a savings account with other money you cant treat one bit of money as borrowed and the other as soemthing else. And through a savings account its just use of savings and isnt borrowing. The $$$ into the saving are but thata ccount doesnt produce income so the deduction principle is compromsied. Its like asking for a martini with the gin taken out after its made. You cant. Its all mixed up. The gin is X% of the total drink now. You cant just drink the gin.

 

I think I understand.

The money that will be advanced to me is going to a savings account linked to my offset. Because it will affect the interest of the loan and its purpose (reduce interest on home loan) it is now contaminated.

I will now have to pay L2 and L3 off and redraw them to ensure the loan is not contaminated.

Is the above correct?

I have emailed my broker to confirm I am able to redraw on L2 and L3

 

Are L2 and L3 already used or are these the extra borrowings?
(which seems to contradict what you have written above)

 

Thats part of the issue. Maybe. See also Terrys comment.

 

I'm not sure what you mean by "used/extra borrowings".

They are new accounts just created.

 

Have you used those funds?