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How to get cash deposit back and repay using borrowed money

Discussion in 'Accounting & Tax' started by doubletoplei, 13th May, 2016.

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  1. doubletoplei

    doubletoplei Well-Known Member

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    Following one of Terry's post on using borrowed money to fund investment purchase, I am having a weird situation that needs some suggestions.

    Going to attend an auction in Qld next Saturday, got loan pre-approved. The house is around 500K, so with all the extra fees, total cost would be around 520K. I have 120K cash in hand, and would like to put them into Term Deposit and borrow back, plus 80% of the house value = 400K. Essentially, I will be borrowing 520K (105%) from the bank, secured by the property (80%) and my own cash (25%) sitting in the bank.

    Here comes the question: If I win the auction, I would have to pay a deposit, whether it is $1000, 5% or 10%. How can I pay this now and get it back from the agent, so that all money on the purchase are borrowed? Can I use a $0 balance credit card to pay for deposit?

    Thanks very much for reading, all ideas welcome.
     
  2. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    You cant secure a property loan using cash.
    Unless the card is refinanced to a loan you may incur deduction issues with a card.

    Unless you use borrowed money you havent financed a thing. No loan. No interest deduction now or future. So use borrowed $ and refinance it to a loan asap

    eg You draw the cash on acredit card and then give it to agent. May not be a loan for property. Use the card to pay using agent merchant facilty = a loan.
     
  3. doubletoplei

    doubletoplei Well-Known Member

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    Hi Paul,
    Thanks very much for your reply. I understand your point, but I thought the agent would like me to either give him a cheque or to transfer some amount of money to his trust account (BSB + account number)?
    At this stage I can think of the following two options, not sure which one is the most ideal (tax deduction wise) for my situation please?
    1. Use my own cash say 5K to take a bank cheque, bring it to the agent, ask him not to give it to the seller. On settlement day, using the approved 105% loan to pay for everything, and ask the agent to get my cheque back.
    2. Use a $0 balance credit card to pay 5K (through agent's merchant facility, not through cash advanced, as advised). On settlement day, use the approved 105% loan to pay for the remaining balance (105% - 5K deposit), after which the loan account will have 5K left. Use this 5K to pay off the credit card.

    Many thanks for your help.
     
  4. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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  5. doubletoplei

    doubletoplei Well-Known Member

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    Thanks Terry. Would credit card payment considered as "borrowing from someone" in this case pls? Many thanks.
     
  6. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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  7. Miss_D

    Miss_D Active Member

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    Line of credit perhaps, so therefore would be against a loan?

    An agent is not going to give you back money for the deposit. They use the deposit money to take their fees before transferring the left over to the vendor. You will need to have organised your line of credit before the auction. If you put it on cc the agent may not accept what the minimum requirements of the deposit is. Talk to the agent first and find out what their acceptable options are, amounts and time lines. Eg some bank auctions wont accept the money on the monday. it must be done on the saturday. But this is dependant on the agent and amount and if you have spoken to the agent before the auction, they want you to bid, the higher the auction price the more the cut the agent gets
     
  8. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    LOC may not be a valid loan if its not refinanced within the month.
     
  9. House

    House Well-Known Member Premium Member

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    Hi Terry, would it be as easy as having a $40k deposit, giving it to a (trustworthy) friend, borrowing the whole lot back and then claiming the tax deductions? Is there any paperwork involved to show the friend loaned the cash to you?
     
  10. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    The ATO would apply Part IVA to deny any deductions in this case. Need a written loan agreement borrowing someone else's money
     
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  11. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    Part IVA - A scheme to obtain a tax benefit. You know what ATO would do ?

    Assess the friend on the $40K income
    Deny the borrower a deduction.
    + penalties, interest and objection and appeal costs.

    At its simplest level the friend would have assessable income and no deduction so they might not like your scheme.
     
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  12. doubletoplei

    doubletoplei Well-Known Member

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    Hi Miss_D
    Talked to the agent, he is fine with 6K deposit using my cc, but says not facility, so have to do cash advance.

    Question Now:
    If I have to pay the agent 6K on the auction day, which way is better(tax wise)?
    1: Transfer savings to agent's trust account (apparently not recommended ??)
    2. Transfer cc balance to agent's trust account (cash advance) and when settlement happens, using the approved loan to pay off the cc. May incur $100 ish credit interest.

    And if I do go with method 2, what are the benefits? The ones I can think of are:
    1: Still used borrowed money for investment purposes and cc will be paid once settlement happens. so (possibly) tax deductible on the $100ish credit card cash advance interest?
    2: Still 105% purchase price borrowed (not 105% - $6000), which means I can take my 25% cash out of the loan in the future, rather than (25% - $6000)

    Many thanks for any comments.
     
  13. sanj

    sanj Well-Known Member

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    if you're talking only 6k then I wouldn't be too stressed about it. sure if there's an easy way to make it deductible then do so but ultimately you're talking $300/year in deductions based on 5% of 6k, so if you're on 38% tax bracket = just over $200 out of pocket.

    not worth lending it to a friend and borrowing back etc or any other convoluted scheme.
     
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  14. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Interest on $6k at 5% would be about $300 per year. of this you may save 37%.

    Not worth the bother.
     
  15. doubletoplei

    doubletoplei Well-Known Member

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    Thanks Terry, was just too obsessed with what you mentioned in your tax tips and tried to get a "perfect plan". Didn't realise the saving/tax benefit is trivial... Well is the benefit is only ~$100 then indeed I don't need to bother. Probably just pay it straight away...
     
  16. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    yeah, and you might incur cash advance fees and interest at high rates on the CC too.
     
  17. chylld

    chylld Well-Known Member

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    What exactly does this mean? It has been mentioned before in another thread:

    I understand that a LOC is at call etc, but wrt deductability what conditions must be fulfilled, and what actions must be taken by the borrower, in order to preserve the purpose and tax deductability of a LOC? (besides the obvious i.e. not contaminating)