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Loan Split/Contamination Question

Discussion in 'Accounting & Tax' started by albanga, 29th Feb, 2016.

  1. albanga

    albanga Well-Known Member

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    Hi All,

    Just a real quick one.
    If you were to refinance and as part of that release some equity, say 50k and the bank put that into a new blank offset account, then at that stage the loan is not contaminated.

    If you then however wanted to add more funds into the offset it would be contaminated so your best option from my understanding is to pay the funds back into the loan, leaving 50k in redraw?

    If that is the case then my next question is what happens if the additional funds from settlement (say you had some money in redraw at the time of refinance) was also added into the offset loan?
    Say for example and extra 1k, making the amount in the offset 51k?

    If you pay it all into the loan then 1k is not offsetting anything?
    If you transfer just the 50k and leave the 1k of borrowed funds in the offset and then transfer non borrowed money what happens? Is only that 1k now contaminated? Or is the entire 51k?

    Sorry if this does not make sense?
     
  2. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Putting money back into a loan is repaying it. Taking it out again is reborrowing.

    So it doesn't matter what the source of the deposit into the loan is
     
  3. albanga

    albanga Well-Known Member

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    So if I am reading this correctly. If you have the 51k sitting in offset and you then go and add personal non-borrowed funds of say 50k (I read this is mixed, 50k borrowed and 50k non)
    As long as you pay the 50k borrowed back into the loan split and redraw it for investment purposes it keeps its deduct-ability, even if contaminated initially?
     
  4. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    yes.
     
  5. albanga

    albanga Well-Known Member

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    Thanks @Terry_w
    I had no idea it worked like that.

    So sorry last thing, if I did this and then my funds built up in the offset (50k borrowed and 50k savings), I then found an investment property i liked and wanted to pay for a deposit.

    If I just paid for the deposit directly via the funds in the offset I would have mixed the funds making the deduction hard to calculate (did the deposit come from loaned money, saved money or both?)

    If I however pay 50k from offset into the loan and then redraw it via a bank cheque and pay the deposit, then the 50k deposit would be fully deductible?
     
  6. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Yes because you have borrowed to invest. It is as if you hada $50k loan which you fully paid off and then took out a new $50k loan.

    Watch out for mixing issues though
     
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  7. albanga

    albanga Well-Known Member

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    Sorry what do you mean by "watch out for mixing issues" exactly?
    What I have suggested above is to try and avoid that.
    So what exactly with mixing in the above could you avoid?
     
  8. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    If you pay $50k into $100k loan and redraw $50k it will be a mixed purpose loan. For example
     
  9. albanga

    albanga Well-Known Member

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    Got it.
    Thanks again @Terry_w, another very insightful conversation.
    My understanding of loan contamination just got a little less muddied (I think :p)
     
  10. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Or a little less mixed
     
  11. albanga

    albanga Well-Known Member

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    Sorry Terry last question, promise :)
    So if you have split it correctly and then your now ready to pay for a deposit on an IP, you would transfer the 50k back into the 50k split.
    You would then usually do what to pay the deposit? Get your lender to draw up a bank cheque? Or can your transfer from your redraw?

    What is best practice?
     
  12. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Best practice is to use a LOC and pay directly from the loan. If you can do this with an IO loan that is probably better but if you have to cause the money to take a detour on the way you risk deductinility.
     
  13. Elives

    Elives Well-Known Member

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    if you don't have a LOC or can't get it with your package what would be the next best thing?
     
  14. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Change lenders.

    If you dont want to do that try an IO loan paying directly from the loan account.
     
  15. Elives

    Elives Well-Known Member

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    what do you mean by that? you already would have original loan and 1 split and offset&redraw
     
  16. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Dont make borrowed money take a detour into an offset account. See tax tip 1