Interest Deductibility - Stamp Duty subsequently refunded

So normally a home loan entails purchase price i.e. $300,000 plus say $10,000 stamp duty. Therefore total interest on a 310,000 loan i would count as fully deductible (if rented out).

If a buyer is subsequently refunded stamp duty as part of the FHOG , has anyone had a decisive knowledge as to whether this is treated as a seperate refund outside of your loan - in other words interest on the 310,000 will still be treated as fully deductible as the original loan was for both stamp duty and purchase price? The refund of stamp duty is therefore treated as a seperate transaction and payment by an organisation back to you, and doesn't in any way affect your interest deductibility?

Thoughts?

I have the cheque for the refund and am planning to auto-deposit it straight into my offset account. THe only way to avoid (if indeed i have the wrong idea from the above) interest complications if the refund voids the original intentions of the loan and therefore the interest deductibility, would be to have the cheque refund from OSR deposited straight into the mortgage account? If it went into the offset it would become a mixed purpose funds/slush would it not?

Thoughts and advice would be appreciated as I am sure this is common?

 

No it wouldn't - the $310k interest - be fully deductible.

You should reduce the loan amount with that cheque.

 

I agree with Terry. Same principles are seen frequently in margin loans etc for shares. If the shares are sold the proceeds (up to the amount originally borrowed !!) should repay the loan. If not, that portion of the loan loses its nexus to the income producing use (s8-1 of ITAA limbs) and becomes non deductible.

However if the proceeds fall short, the loan doesnt need to be repaid (in full) and may continue to be deductible for the loss element.

 

To clarify, terry you said no it wouldnt, in other words the refund wouldnt affect the deductibility? But why then is the recommendation to pay it off the loan amount when i can merely put it straight into the offset?

Paul i understand the share sales, however id argue slightly diff. Here your income producing asset is gone. So the nexus to income severance is alot less. Here my property still stands, merely a portion of the cost is being refunded to me outside the loan? but basically your agreeing with terry and i,correct? The full 310k is still deductible? However, i cant understand why not deposit the 10k cheque straight into the offset and maintain flexibility than against the loan account?

 

Sorry for vagueness - no the interest on the full $310k would not be deductible

 

The $10k stamp duty was not incurred because it was refunded, so you could not borrow to pay this and keep claiming the interest after it was refunded.

 

I'd also be curious on how this would be treated :

Digging into my bank statements I've realised that what bank has done is basically:

Loaned me 300k for the property (80% of lvr). They've taken my net 20% equity contribution required and also taken out the additional $10k for the stamp duty.

So say my equity contribution for 20% LVR was $50,000, they've taken $60,000 out of my own cash/bank accounts and deposited this into the loan account for settlement. Upon settlement they then disbursed out $10,000 of the stamp duty on settlement through the loan account (so an in and out), and so the net result is $50k contributed , and the remaining loan of $300k?

Would they look at this therefore as if i had paid the stamp duty out of my own pocket, except in this case the bank has taken the cash, put it into the loan account, then paid it from there as part of the overall settlement, rather than had i paid it seperately myself?

I have deposited the cheque into my offset but supposedly it can be reversed and placed into my mortgage account today if i get there in time to the same teller. I assume moving the money from my offset account to the loan account would be considered tainted even if i do it within today or once the cheque clears in the next 3 days?

 

Given the urgency (< 2 hours before the teller closes to have the cheque moved/reversed) - any suggestion?

I would be inclined to argue that the stamp duty was paid by me, but the bank did it via the settlement process by taking out the $10k from my bank accounts, placing it into the mortgage, then paying it out/disbursing it from there.

My worry is the ATO won't care and won't identify the stamp duty as a seperate item that was paid in and out of the loan account, and treat the loan account as one big mush of money.

If it is the first - then a refund cheque wouldn't matter as it was my own money paying it out in the first place that i'm getting a refund for. But the fact that the bank transfered my $10k cash into the loan account before disbursing it out to pay the stamp duty, can i still claim this as being paid out of my own pocket, and that the remaining loan funds once settlement finished was still 80% of my total contracted land purchase price (which it was).

Thanks for any quick response.

 

Sounds like a mess and you may have more issues. You had better sit down with a tax adviser and sort it out properly. I cant follow.

 

Essentially what happened was i borrowed 80% LVR of the land purchase price.
As part of settlement the bank took my 20% cash deposits required, but also took my $10k worth of stamp duty with it, contributed all of this to the loan account, then subsequently disbursed the stamp duty payment from the loan account.
So in essence it was my $10,000 cash paying for the stamp duty, but as part of the settlement process the bank paid the stamp duty by taking my cash, putting it into the home loan account, then disbursing it out.

So my question is the loan amount to me, can be purely identified as 80% of the property, nothing stamp duty related. However technically the stamp duty money went in and out of the loan account due to the banks processing. What are your thoughts on this?
I only ask as I don't have time for a tax adviser (i don't have one) - i'd only have just over an hour to shoot to the bank to redirect the cheque deposit. So just needed to make a call now.

 

I'd argue the $10k stamp duty and settlement agent costs, disbursement costs etc - were all paid out from my own cash, but via the home loan account?
I can directly state that the loan is therefore 80% of the land only, and no other costs.
My only worry is if the ATO views the cash deposited into the home loan account as one mixed mush of funds. So in other words they don't view the ins and outs for stamp duty and other costs as netting off each other. So in other words whether the ato view the net loan as a pro-rata portion of the land, the stamp duty, settlement costs etc.
Surely they're not that silly and finnicky, as clearly the stamp duty and settlement costs were paid all by me, just taken by the bank and paid into their home loan account, from where they paid the stamp duty from....
Thoughts?Hope you can follow...

 

I would hold off on going to that bank until you get advice.

 

i'd already deposited the cheque in at lunch time, hence why I was curious as to reverse it into the home loan i'd need to do something by COB.

Did you have any opinion? Not taking it as advice legally, but would you argue that i have still paid the $10k cash out of my own cash/pocket, just that the bank has taken it, put it into the home loan, then disbursed it out for stamp duty payment, therefore everything is still seperately identifiable?

 

No opinion.

 

Ok, no worries.

One final question, if you live in a house for a few years, then choose to rent it out - one must backtrack to year 0 to work out how much of the loan at year 5 relates to property, and how much to non-property in working out interest deductibility?

 

I am inclined (for the record) to leave the cheque as being refunded to my offset and not against the loan account.
My argument and reasonable belief therefore is the stamp duty was always paid by my own cash, jsut that the bank chose to transfer this into the mortgage account before disbursing it as stamp duty payment.
Therefore I'd argue the loan that was remaining when all was settled should be only land/property related (as it was 80% LVR at the time) - in other words the cash going in and out of the mortgage can be directly traceable as being stamp duty paid by myself.
Therefore the refund cheque for stamp duty should have no effect on the deductibility of the loan as in essence the loan was never to include stamp duty anyway. Which I believe is the same with all banks (you can't finance stamp duty so it is always out of your own pocket)? So the logic should be forseeably agreeable by the ATO if they ever query?
I would think this is a common occurence. Many would pay $2000 in settlement fees that include provisional council/water rates, and get a subsequent refund adjustment when rates turn out to be lower than budgeted in settlement. I am sure 95% of people sock it away into their offset or private accounts, but continue to claim 100% of the loan interest? In this caseI believe these settlement costs are also always on top of loaned amounts (like stamp duty) - i.e. have to be contributed by the owner out of pocket? SO again.. shouldn't have tax implications on deductibility of interest?

 

Also, banks don't (correct me if im wrong) ever lend money for your settlement costs: stamp duty, agent, etc. anyway? So by logic they'd never had lent the money anyway, although on paper they've certainly put the cash into the home loan accoutn and paid the stamp duty from there.

IN the future ill make sure anything like this potentially gets paid out of a non home loan account, even though my cash contribution is the same... tax sure makes you suffer at times.

 

I can't really follow exactly what has happened either, but I would have thought the "safer" thing to do would be to put it back into the loan, rather than into the offset account (which is essentially giving yourself cash).

 

Stamp duty would be a disbursement usually. You would give the bank permission to draw on your account to make up for the shortfall on what they are lending you and the purchase price. So perhaps you havent borrowed the stamp duty. It might be more appropriate for it to be deposited into your offset.

But I can't follow so I am not sure.

 

Yes