Investment Property loan account setup to achieve deductible interests

Dear experts,

I just bought an investment property using equity. I am setting up loans and accounts to achieve deductible interests. I have read Terry's tax tips, which is extremely helpful, and I wish I should read earlier. Thanks Terry. However, I still have some points not quite understood if anyone can help me. Thanks in advance.

PPOR: 600k loan L-A with offset account OA-A
IP(500k): 400k loan L-B with offset account OA-B

I split 150k loan from L-A to be L-A1, pay back and redraw all the money to a new account A-C.

I pay deposit, stamp duty, etc. using A-C.

My questions:
1. I can NOT pay the mortgage of L-B and L-A1 using A-C, should be fine pay them using OA-A, isn't it?

2. I should NOT transfer any other non-borrowed money into A-C, isn't it?

3. If I want transfer more non-deductible loan to deductible loan, e.g. spilt another 20k from L-A to be L-A2, pay back and redraw the money to A-C, then pay investment expense still using A-C. Is it right way?

4. What will happen if I accidentally pay some non-investment expense using A-C? Will it void all the efforts I have done?

Thanks,
Ron

 

Hi Ron your numbering system is confusing.

 

I can't interpret the original post and it's really not complicated.

When I release equity, I leave the funds in the redraw facility of the equity loan, or in an offset account against the equity loan. I don't mix any other funds into it so the loan doesn't get contaminated.

To figure out how much interest charged on each loan for tax purposes, look it up online. The loan account summary tells me how much interest was paid for the financial year. If your bank doesn't have that info online, simply call them and they'll give you a figure within a minute or two.

 

Sorry Terry, let me try to clarify, I hope this time will be a little better.

* I have a PPOR loan 600k with an offset account
* The Investment Property price is 500k, so it will have a new loan with an new offset account
* I split 150k loan from PPOR loan to be an new loan (name it splitted loan), pay back and redraw to a new created account (name it splitted loan account)
* I should pay deposit, stamp duty, etc. from "splitted loan account" .

My questions:
1. Which account I should use to pay the mortgage of "investment property loan" and "splitted loan"? I should NOT use the new " splitted loan account ", isn't it?

2. If I want transfer more non-deductible loan to deductible loan, e.g. spilt another 20k from PPOR loan, can I redraw it to the same "splitted loan account"?

3. What will happen if I accidentally pay some non-investment expense using "splitted loan account"? Will it void all the efforts I have done?

 

Thanks for your reply. Actually, I already mixed the loan. When bank ask me if I want to combine the equity loan into my existing loan, I said yes. And I already paid the 10% deposit using the money in the PPOR offset account. That happened 2 days before I ready Terrys's tax tip. Right now, I just want to do it right when paying the rest 10% deposit and other stuff like stamp duty.

 

1. You should probably use the cash offset account to pay the interest on all loans

2. Its getting messy. I wouldn’t recommend this

3. No, but the you may have borrowed to pay interest and this may have consequences

Seek specific tax advice before proceeding. Read my tax tip 1 first

 

If the property hasn't settled yet, there's things you can do to avoid making things worse and help fix the problem somewhat.

The loans can still be restructured properly, the deposit you've paid can be refunded and paid from the proper place.

See a broker that understands investment structuring.

 

Get some tax advice on this - that covers Part IVA.

 

I encountered a client with a specific issue which highlights blended loans and complexity in fixing it. I will keep it simple to avoid confusion and to ensure privacy.

Loan was approved and used to pay deposits for two proposed acquisitions. Lets call them Unit A and Unit B. Deposits were paid. BA fees were paid. Stamp duty was set aside in a offset.

The property purchases in same development did not progress due to a finance issue. A Third property Unit C was located and provided a better option. The taxpayer used the Victorian duties laws and nominated a new buyer to assume the contracts for A and B. The taxpayer received refund of the deposits for A & B. However the funds did not credit the original loan to repay what was borrowed. Instead the funds were deposited to a savings account for some time with other funds. This has been mingled and is tainted. The nexus to borrowed funds cannot be determined.

The funds in the offset (containing only the former $$ for the duty but lets just call it the equity loan proceeds) and the funds in savings (proceeds of A & B) were then used to pay for Unit C.

I consider the loan is a blended loan.
1. Units A and B have ceased to be contracts and the proceeds repaid but the loan wasnt repaid. So the loan ceases its deductible nexus at the time when the deposit was repaid to the savings account. Choosing not to repay the loan does NOT leave it with a deductible nexus.
2. The proceeds were never paid to reduce the loan. If it had, a new redraw could have later occurred and the new loan sum would have had a deductible nexus to Unit C.
3. The taxpayer used the savings to pay the deposit on Unit C. However as no funds were "borrowed" for this purpose and the source of funds was the savings there is not a refinance OR a new borrowing.
4. The duty $$ set aside in the offset poses no concern - It has been used to assist with Unit C. IMO this is the sole deductible portion of the loan that is still deductible.

Can this be fixed ?
No. Not 100%. Only in part through a loan split to preserve the deductible $$. The non-deductible cant be repaid in full and redrawn as insufficient cash is available. If the taxpayer had sufficient cash the new split for the non-deductible might have been capable of fresh redraw as a new loan BUT a retrospective refinance isnt possible.

Can the loan not be split and refreshed ?
No. Not 100%. You cannot repay only the non-deductible % and redraw it. This would always leave a % deductible and % non-deductible. Its the analogy that Terry likes to use of blending urine into a drink. You can NEVER separate them later. You cant remove just the urine.

 

I don't think I have enough borrow capability to borrow another 10% to exchang the mixed part out. In this case, the only way to fix is to ask for the realestate company refund and pay again? But actually, I asked the agent, he replied the trust account need to be very carfully treated.

 

Thanks Terry.
Pay investment expense using borrowed money from loan.
Pay loan interest using cash.
For No.3, could you explain a little bit further? what consequence it might have?

Thanks, Ron.

 

Yes. The agent as party to a scheme to obtain a tax benefit. Not a problem for the agent but it may mean the "deposit" is merely washed and given the appearance of being repaid rather than a true contractual obligation. If it looks and smells wrong it probably is.....

eg You pay $40K to the agent today and he repays the "original" $40K you had paid a month ago to your bank tomorrow. Isnt this just a laundering arrangement ? A sham ? Its probably not a contractual return of the original deposit and a new deposit. The legal issues with the return of a deposit and no new contract may be a problem for enforcement later if the vendor wanted out. They argue you got your deposit back and never signed a new contact ??

 

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

 

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