Help needed on redraw stuff up

Guys hoping someone can shed some light on this scenario/position my brother has found himself in and also for others to learn from this stuff up! Me included!
Basically He had purchased a property in 2013 that was being leased, and is still being leased to date(not exempt from cgt now). He wanted to eventually live here one day but plans have changed.
Now the sticky part is there was no offset, only a redraw attached to loan. There is now as an example 350k in redraw (360k) loan.
He is now in a position to purchase a ppor, and is at a blank as to how to get the funds out of the redraw and into the ppor, whilst having the interest still tax deductible. I know that interest is only deductible if used for investment purposes so would an option be to say take 10k at a time out of the redraw to purchase shares, then sell shares and place funds in an offset untill time to buy ppor?
His house was purchased for approx 600k at the time, is now worth approx 1mil. Basically he is trying to come up with a way to LEGALLY take the money from the redraw (an IP now) and put it into the future ppor purchase, so the interest can be tax deductible.
Unfortunately this is far above my pay grade and I wouldn't really know where to start so I thought I'd ask people far smarter.
He is going to catch up with his accountant in the coming week but Again thought I'd ask here too!
Cheers all

 

Purpose for which the funds are put. Private. Non deductible.

Redraw to purchase shares or an investment asset. Deductible. Shares sold or investment sold and funds redirected elsewhere.

Paragraph 48 of TR 2004/4 states:

By contrast, where the taxpayer does have the legal power to repay the loan and hence avoid incurring interest liabilities, the reasoning of Dowsett J in Jones in the first instance suggests the nexus will continue until a time at which it can be inferred that:

the taxpayer has kept the loan on foot for reasons unassociated with the former business; or

the taxpayer has made a conscious decision to extend the loan in such a way that there is an ongoing commercial advantage to be derived from the extension which is unrelated to the attempts to earn assessable income in connection with which the debt was originally incurred.

Although not a business the same principles apply and he would have kept the loan on foot for other reasons. Browns case says not deductible.

Yes if had an offset attached to the IP he could take money out of the offset and it would increase the loan on the IP. However he didnt do that.

Could sell the property to a trust or partner but need to weigh up the pros and cons

Curious didnt he discuss the original loan structure with his accountant ? A 10 minute discussion could have prevented a tens of thousand dollars decision.

 

Absolutely right, it would of been a simple case f offset account and he wouldn't have this problem.
So buying the shares and then later selling aand placing the money in offset as opposed to back in the redraw is not deductible, unless you can genuinely prove that the share trading strategy is a genuine strategy and not one employed to extend the loan in such a way that there is an ongoing commercial advantage to be derived from the extension which is unrelated to the attempts to earn assessable income in connection with which the debt was originally incurred, as per your example?
Thanks very much for your reply mate

 

Even if it was a genuine share trading account and you were genuinely doing share trading you have breached the requirements set out to continue deductibility of the 100k loan.

Youve only looked at one condition. The first more important one is

the taxpayer has kept the loan on foot for reasons unassociated with the former business; or

And even if the case law wasnt clear part iva would apply to deny the deduction.

Agreed not the best position to be in.

 

Yep ouch, main dilemma here is the need/want to purchase a ppor but all the money being tied up in an investment loan, again he could just take the money out but be faced with an approx 15k loss in tax deductions, next option is just live in the home and buy an investment however he would be liable for cgt if he was ever to sell either property. Valuable lesson here! Very expensive but valuable none the less
Thanks for the replies mate, greatly appreciated

 

Look, it's not all bad. Focus on the positive.

He bought 4 years ago for $600K, current value $1m.

Pretty impressive.
Marg

 

He might be better off selling the IP. Perhaps to a related entity

 

As terry says might be worth considering. Basic sums say probably not.

400k gain. If held in one name probably not worth it. Two names might be.

400k gain. 200k each. 50% assessable. So 100k addition to taxable income each.

Consider a deductible contribution to super.

100k each @ 30% is about 30k each. 60k total.

You say the depreciation is 15k. So tax benefit about 4.5k @ 30% tax rate.

13 years to break even. Plus additional stamp duty kn transfer maybe 15 to 18 years to break even.

Basic sums say transfer probably not the best.

 

Is it possible for his partner to purchase a home (ppor) and he lends her the 350k at say a few percentage points higher than his mortgage rate? That way he is generating an income from the interest he's charging/receiving for lending her the money?

@Marg4000 I agree Marg, on paper and at a bbq discussion its great however, purchased for tad over 600+ stamps, legal costs and a quick spruce up add 50k, if he sells there's another 50k in agents, legal and a tidy up there plus cgt it quickly becomes less impressive! Just another example of how important structuring is from the start

 

Onlending to the partner wont help.

She will have non deductible interest. He will have interest income less an interest deduction. In fact he will be worse off as his interest income will be slightly higher than the interest expense.

From a tax perspective a bad decision.

 

It is an option mate, I think his better half is putting the heat on for them to move into their own home, the only reason for him not to sell I guess was the whole cgt scenario, but every off ramp on this freeway leads to 'pay tax' due to the lack of offset! I think the main issue is he wants to be able to sell the new ppor in afew years with a cgt exemption (assuming price rises after renovation)

 

Read an interesting article which i shared with terry which shows if you own your own home and a few investment properties worth say 1.2m total and receive rent you are worse off than someone who blew all their money on luxury holidays and then receives the pension.

Was an interesting food for thought.

 

Hahaha mate the phone call I had with him this arvo ended on those lines, not as eloquently put might I add but was along the lines of what you concluded!

I just said to him move into the IP and never sell it, by franked income producing shares with the 350 and then just pay the cgt on the next investment property buy/sell he does. Im fortunate enough to be a very lazy buy and hold type however I could see how this scenario could effect me In accumulating assets.

So Michael, where should I tell him to go on this luxury holiday haha!
Thanks for the replies mate, your feedback has been invaluable

Any chance you could post a link to the article mate?