Have I made an irreversible mistake?

Looks like I have made the classic mistake of mixing monies that @Terry_w has been advising against.

Scenario is as follows:

2 months ago I got my investment Property-1 refinanced to a "Small-Lender". Based on 80% LVR and current loan of $350k I got loan of total $585k in two splits. Both are secured against Property-1

New Loans
-----------
Split Equity Loan-1 = $235k
Redraw available = $235k
Hence I am paying $0 interest. Purpose is to use this money to buy future property.

Split loan-2 = $350k
Redraw available = $0
Hence I am paying interest on full $350k


Both above loan's repayments are being made from a CBA offset account (this is where my salary and rental incomes go) which is offsetting another investment loan in CBA. I don't have PPOR.

So far so good.

Then I bought an investment Property-2 and needed $140k for 10% deposit.

I redraw $140k from Small-Lender Split Loan-1 and put it into the CBA offset account. I then transferred it from there to agent's trust account. The money was sitting in offset account for 3 days.

Why did I not transferred $140k from redraw account directly to agent's trust account?

Because Small-Lender does not provide saving accounts facility and the property was bought at auction and I needed to immediately transfer money into agent's account which I couldn't do using Small-Lender's redraw account.

In addition to that, I have transferred another $63k from Small-Lender Split Loan-1 redraw to CBA offset account so that I can prepare stamp duty cheque for $63k. This money is sitting in CBA offset for few days now until I prepare the stamp duty cheque.

Please advise if I have made a mistake. If yes, how to fix it?

 

The classic mistake of mixing borrowed and unborrowed money plus the parking money in an offset trap.

To fix it you would need to get the money back from the trust account, put it into the loan again and then repeat, but avoiding any mixing.

see
Tax Tip 1: Parking borrowed money in an offset account Tax Tip 1: Parking borrowed money in an offset account

Tax Tip 63: Don’t cause borrowed funds to take a detour Tax Tip 63: Don’t cause borrowed funds to take a detour

Tax Tip 53: Paid Deposit with cash - how to fix big mistake before settlement Tax Tip 53: Paid Deposit with cash - how to fix big mistake before settlement

 

Thanks @Terry_w for quick response.

The problems I am facing are:
The nominated account attached to Small Lender's redraw account is my CBA offset account. I can only transfer money into a nominated account. So even if I get 10% from agent back into redraw account, how am I going to pay agent the 10% again. The money has to make 1 hop (that is via a savings account).

What if I open a brand new account with $0 balance and use that as temporary account? Will it help?

2nd problem - How to pay for stamp duty cheque directly from redraw account? Can I use new $0 account temporarily?

 

have a read of my tax tip 1

 

Here is bit of update:

I called up ATO this morning and explained them my situation. I explained them that I couldn't transfer the money directly from redraw account to agent's trust account for 10% deposit. I deposited the money into my savings account that contained other monies such as my wages and from there I paid for my 10% to agent's account. Hence the money took a detour.

I also rephrased my situation in different words so that ATO agent is absolutely clear on what I am asking.

She said, as long as you have the receipt to show that money withdrawn from redraw account is used to buy investment property you can claim tax. It does not matter if the money was first deposited into a savings account. You had to do this because bank did not allow you to transfer money directly from redraw to agent's trust account. So, as long as money from redraw was used to buy investment property you can claim interest.

These were more or less her words in my conversation.

Towards the end of conversation when I was satisfied that she didn't miss-understood my query and she fully answered the query I asked if I can refer to this conversation later in case ATO questions the deductability of interest during future audit. She said yes and she provided me an reference id for this conversation which she said can be pulled up in future.

Now my question is:
Let's say I go ahead and claim interest. Few years down the line if ATO questions my claim, can I use this conversation as my defense?

 

No, especially since there is legal precedent to say the ATO is wrong, but none to support their view.

But if you are audited and caught out you could use the reference to ask for a reduction in penalties.

If you want an answer that you can hold the ATO to you will need to apply for a private ruling (and then not deviate from what you told them).

 

No. It is not a private ruling or a decision of the Commissioner. These are binding on the Commissioner subject to all the facts and circumstances remaining correct. It may assist you avoid penalties for recklessness. There are existing public rulings to this effect which are precedent decisions and part of tax law. For verbal conversations the Commissioner would argue that you did not make a request for binding advice and it was general information. A private ruling request is made in writing and the Commissioner may request copies of the account transactions that you refer to.

If you draw $$$ from a loan and park it in a offset and then use the offset to pay for acquisition costs then the attributable interest would be deductible for that IP if the only funds in the offset (or a savings account) are those borrowed funds. But if the offset contains savings as well you have a blended offset (or savings) account. When you draw out the funds only a % of it is deductible. It is NOT 100% deductible unless the % attributable to savings art that point in time are materially insignificant to the maths

eg $400,000 borrowed. Blended with $1,200 of savings. You pay $390,000 to the bank to settle.

389,000 / 401,200 = 96.96% deductible

If the $400K was all used the deductible would be 99.70%. You cannot assign the $400K based on the sum deposited. Just as you cant "park" deposits into a loan and draw them out and disregard the impact. There are existing rulings to this effect which are precedent decisions and part of tax law.

 

Thanks @Paul@PFI for replying.

If I understand your example correctly the interest can be claimed 100% if blended amount is exactly equal to the acquisition cost.

Example:
Borrowed money is $400,000 (with redraw of $400,000. So interest paid is $0 till no acquisition.)
Savings account contains $200,000 (money from wages etc.)

Then I commit to buy a property for which acquisition cost is $150,000
So $150,000 is taken out from borrowed money(redrawn) and deposited into savings account.
Savings now contain $350,000 of blended money.
Interest starts to incur on $150,000 in redraw account

From savings account $150,000 is paid towards acquisition cost.

This interest (on $150,000) is tax deductible.

Is this correct?

The scenario I described above is my actual scenario except the numbers are different.

 

no
You put $400k into an account with $200,000
total $600k
Then you withdraw $150k
at best you would be able to claim 66% of the interest
at worst 0%.

 

You can use the blended loan calculator we provide as a client tool.

I also noted the comment money was REDRAWN from the loan. This may mean that the originating loan AND the offset and both blended too

 

No Terry. I did not put $400k into savings. I only put required $150k into savings. Because that's what I need for new acquisition.
And I intend to claim for interest incurred only for $150k.

 

Looks like I did not explain correctly.

To start with the redraw loan account is pure(no mixing) independent loan and has $400k available. This means I pay $0 interest until I withdraw any money.

When I commit to buy a property for which acquisition cost is $150k, I transferred $150 from redraw account into savings account of different bank (current balance $200k). After transfer balance is $350k in savings.

As a result first bank in which I have redraw account started to charge me interest on $150k. Because that's what I redrawn. I still have $400k-$150k = $250k available to withdraw for future.

 

So you borrowed $150k and place this in a savings account containing cash?
How much cash was in the account while the $150k was in there and did this change?

 

So its a loan drawn down not a redraw. A redraw is what occurs to a loan after it is setup and initially drawn down. ie You pay a loan down and then redraw new funds to the approved limit.

Redraws can be problematic when the purpose of the original drawn amount and new amounts redrawn have different purposes.

TR 2000/2 address redraw and LOC type facilities and the blending issue

 

Screenshot of my savings account is attached.

I got $140k into savings on 15th Nov. On auction day (21st Nov) I transferred $141,000.85 into agent's trust account.

I anticipated to buy at auction for 1.4m and actually bought for 1.41m during auction.

 

so the offset had cash in it when you place borrowed funds in it. Therefore you cannot trace the used funds to the borrowed funds.

IN my opinion none of the interest should be deductible.

But the ATO may not be as harsh and may allow some,
You will need to use Paul's calculator to work it out. At most 63% of the interest could be deductible, but it is going to be even lower as you had money coming in and out while the borrowed funds where in there and this mixed it further.

 

Yes - the daily calculation required in TR 2000/2 to determine the daily changes can be replicated using the blended loan calculator. Repetitively using the offset will mean that this calculation needs to be maintained forever and be a tedious task

I think interest can be apportioned and would be under 63%. Note too that the repayments and new drawn amounts etc all need to be apportioned in same daily % also. eg $720 will comprise 63% deductible and 27% non-deductible. And so on. New money drawn will further adjust the %.

 

Thanks @Terry_w and @Paul@PFI

Since the settlement is 5 weeks away. I can ask re agent if he can help to fix.

Process would be as follows:

Before:
Agent's trust balance = $141k
cash saving account $141k
Redraw account $x

Steps to follow:
1. cash savings account -- 141k-- > Agent trust (balance $282k)
2. Agent's trust ----141k--> redraw account (bring it back to original state)
3. Redraw account -------141k --> Agent's trust (balance now $282k)
4. Agent's trust ---- $141k ---> cash saving account.

After
Agent's trust balance = $141k
cash saving account $141k
Redraw account $x

I have to involve solicitor to prepare paperwork for above process. Agent may not agree to it.

 

agent won't agree to release funds held on trust unless the other party agrees.

Get tax advice on part iva.

If you have available funds you can just pay the money again at settlement and then get the agent to reimburse you from the excess funds he holds.

 

Makes sense Terry. I will try this option. Appears to be easiest among all.