Lender Caused Potential Loss of Tax Deductability Issue

Hi everyone

I have a rental investment loan (say 100K) and offset account with 100K parked in there to save on loan interest. Recently I have refinanced with the same lender to extract increased equity from this IP (for future income producing assets) of 400K. Broker advised the new loan will pay down the old loan which should leave me with a new net loan amount of 300K. This new loan has redraw so I can move the not yet used 300K into it until the money is needed. The original loan was for a rental IP hence any interest on the existing 100K portion and any subsequent drawn down amount should be tax deductable (for income producing asset purchases)

They went ahead and paid down the old 100K loan with the cash in my offset account without informing me first. Had I knew this would happen I would have withdrawn the entire amount out as this is cash to be used for personal purposes and I am very careful not to contaminate it with any investment funds that is tax deductable.

Now the new loan is the 400K parked in a separate account which I can move around. Broker says I can transfer 100K from this loan into another account for personal use, ie. to get my 'old offset funds' back. The rest can stay in the new investment loan and tax deductability won't be compromised. They have requested from the lender full document of the money trial as evidence that this 100K is a substitute for my old offset funds. Will this work ?

The 400K loan now has a net withdrawn amount of 100K (100K offset refunded back to me, 300K not yet used and placed back into the loan as redraw to be used to acquire future income producing assets). Is interest on this 100K portion still tax deductable ?

Otherwise what are the potential options in order to not loose Tax Deductability on this lost 100K ?

Thanks very much

 

A broker giving incorrect tax advice!

 

Yes =( I have a bad feeling what he said may not work with the ATO.

Would it work if I ask him to go back and ask the lender to restore my old offset account and have my original 100K cash parked in there to withdraw on my own and They to reduce the 'new' redraw loan account by the same amount ? ie ... the new loan with redraw contains the full 400K but the lender to reduce it down to 300K .... leaving it with a drawn down balance of 100K to match the original loan amount in order for this portion to be tax deductable like how it used to be prior to the refinancing ?

Thanks Terry

 

You have basically paid off the original loan so any deductibility is lost forever. If you could get the lender to reverse this so it is as if it never happened - not on the statements - you could fix it. But I have tried this in the past and they claim they can't reverse transactions .

Now you might have a $400k loan and have to just look at deductibility going forward.Your $10kk cash is used up though and if you took it out to use for a non-investment purpose it would incur interest which wouldn't be deductible.

At 3% interest you have lost about $3,000 in deductions per year.

Who is the lender?

 

Thanks Terry, lender is Pepper

 

This was a refinance to extract further equity from the IP purely for income producing investment purposes. The cash in offset was to save on interest cost but always going to be used for personal purchases. I have reiterated this numerous times to the broker and was advised that the new loan would pay off the old loan as part of the refinance. So this is a error on the lender's part?

If they reinstate the old offset account with the original 110k cash balance back in there but reduce the 'new' refinanced redraw loan amount by the same amount (thereby making its loan balance at 110k) would interest on this portion still be tax deductible?

If we have a clear audit trial of the loan balance and money movement and a letter from the broker stating that this is an error on their part on the movement of funds, which clearly demonstrates my intention on the use of these funds, would the ATO understand/Grant some forgiveness as this is a purely human error beyond me?

 

Lesson for next time.

 

But this is caused by the lender/broker!!!! Is there any compensatory rights for the customer in this case?

 

Hi Terry, just a general question, if a new loan is taken to pay off an old loan on an rental IP, ie a refinance, interest on the new loan would still be tax deductable right ?

 

No idea. but next time, avoid the possibility of this happening altogether and drain the offset first.

Can brokers confirm, is Pepper a deposit taking institution? Is the 'offset sub-account' a true offset? Does it have a separate account number, for example, and can the savings account exist independent of the loan? Does this have any impact on what's being tried here?

 

yes painful lesson learnt, but the most bitter part is I have done all the right thing and just felt like I've been thrown under the bus by the broker.

 

Unfortunately, all to common. People assume banks and brokers will do the correct thing but invariably they don't. For others reading, Trainee is right, assume the bank will mix your cash and loans so don't give them the opportunity.

I understand that must be incredibly frustrating.

 

If we can provide clear evidence and documents of this mix up due to the lenders fault, would the ATO would consider granting some sort of exemption ? given the intention of the loan and use of funds etc ?

 

Answer that with the urine example.

If someone, a lender, put 10ml of urine in your 100ml cup of tea, would you drink it if the removed 10ml of urine from the cup?
It was just a mistake afterall

Having said that, there is at least one successful private ruling where the ATO let a mistake slide on something similar. Fat fingers was the taxpayers argument - he transferred money into the loan by mistake, instead of the offset account

 

I don't know that you can blame the broker for this.

 

Yes refinancing doesn't change deductibility of interest

 

I'm not saying this is the broker's fault but he keeps on pushing me to just transfer the 100K funds into personal account to reimburse myself for the lost offset funds and still claim tax deduction on it (as oppose to attempting to fix the error at the lender's end). Pepper made the error.

He assures me that as long as documents are kept it should be OK and just let this go. I just feel that this is not OK and will get me into trouble with the ATO by following his incorrect advise.

 

Is it in writing?

 

Hi Terry, yes that tea cup analogy makes perfect sense. Regarding the private ruling case that you mentioned, if I personally made the mistake then I've only got myself to blame and need to suck up the consequences.

But if this is caused by another party like the lender, is there any avenue I can take to request the ATO to grant some exemption and accept our attempt to fix the mess by perhaps ask Pepper to reinstate the offset account with original funds in it and balance out the amount accordingly in the 'new loan' to reflect what should have happened had they got things done properly? At least this channelling of funds is all done by the lender and not me.

This is not a perfect reversal of what has happened but at least remove the contamination and avoid the action of splitting the drawn down funds 'done by me' for personal use.... thus avoiding the tea cup/urine alike scenario ?