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Maximising Tax Deductibility - Offset vs Investment Loan

Discussion in 'Accounting & Tax' started by LaoBan, 5th Oct, 2016.

  1. LaoBan

    LaoBan Active Member

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    Hi,

    I am a newbie in terms of investing in general, and seeking advice and guidance in regards to maximising tax deductiblity.
    My current situation is as follows.

    • Marginal tax income 37% + 2% Medicare levy = 39%
    • PPOR home loan at 3.92% Interest Only - with 100% offset account
    (the plan is to make this an IP in ~10 years time or sell, hence interest only)

    • IP loan at 4.19% Interest Only

    In addition to property loans above, I also have an Investment loan account at 4.2% Interest Only. This acts kind of like line-of-credit (LOC), except it is normal fully-drawn investment loan, which was setup initially with 150k balance.
    It was setup to be used only for investing purposes (property and/or shares).

    As part of the investment loan setup, I received 85k of equity from my PPOR, which I subsequently transferred the whole amount to the investment loan (so that the balance became 65k). I then put 65k to the investment loan account from my offset, so that I didn't pay interest while waiting to find where to invest.

    I then used 65k from the investment loan to purchase an IP (deposit, legal costs, etc), and all the IP-related expenses (maintenance/repairs, council rates, etc) are paid from this account so they can be tax deductible.

    Also, currently, I pay the interest incurred from the IP loan from my offset account, which is linked to PPOR home loan.

    My questions:

    1. Would I be better off to pay the IP loan's interest from my investment loan account (rather than from offset account)?

    If I do this, does it mean that I can claim both interest from the IP loan AND the interest from the investment loan (incurred by the amount used to pay the interest incurred from the IP loan) as tax deductions?

    If so, based on my calculation, it will better to pay from investment loan vs. from offset. Correct me if my calculation is inaccurate.

    IP loan interest = 4.19% * 300k = 12,570 p.a.

    The "cost" of paying the interest from offset p.a. :
    3.92% * 12,570 = 492.74

    If paying from the investment loan account:
    4.2% * 12,570 = 527.94
    However, if this is tax deductible (this is where I am not sure about), I can save:
    39% * 527.94 = 205.9
    Therefore, net "cost" if I pay IP interest from the investment loan account is:
    527.94 - 205.9 = 322

    I will be $170 better off vs. paying from offset (492.74 - 322).


    2. As I pay the IP-related expenses (rates, repairs, etc) using the investment loan account, am I able to claim the total amount of those expenses AND the interest incurred as tax deductions?

    3. Any recommendations/suggestions of better finance / loan setup?


    Thanks in advance.
     
  2. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    1. no
    2. depends
    3. Get some proper tax advice as there are various issues in the way you have done it.
     
  3. LaoBan

    LaoBan Active Member

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    Hi Terryw,

    Thanks for your response.
    On the way home from work today, I went browsing this forum and read some of your tax tips posts - really helpful for newbie like me (and I am sure many others too). Thanks for sharing your knowledge!

    Regarding your answers to my questions:

    1. After reading one of your posts, from what I can gather your answer is "no" because claim tax deductibility on interest of investment loan or LOC to pay the interest of IP loan is/was a 'grey area' where there was a private ruling against this by the ATO.
    So, in my case, it is better to keep paying IP loan's interest from my offset account, which is linked to my PPOR loan.
    Is my understanding correct?

    2. Can you please elaborate more on what you meant by "depends"?
    What expenses / situations can an investor claim the total amount of IP expenses AND also the interest incurred by those expenses as tax deductions if they are paid from an investment loan or LOC?
    And when is it not applicable, i.e. can only claim the amount not the interest?

    3. From reading your Tax Tips post, I can see the potential issue with my current setup in regards to "mixed loan".

    Just to clarify, in the original post, I said "[The investment loan is] used only for investing purposes (property and/or shares)".
    So far, I only used it for one IP (deposit, legal fees, and some expenses like rates, insurance, etc.) and no shares or other investments, so I hope this means I have not "contaminated" this loan yet!

    Also, when the investment loan was setup of 150k balance.. I unlocked 85k equity (which was put straight back to the investment loan), and the remaining balance of 65k was actually a split from my PPOR home loan, e.g. my PPOR home loan used to be 465k, the 65k was split and went into the investment loan, so that PPOR home loan is now 400k.
    I then put 65k from my offset account to the investment loan straight away, so that the investment loan balance was 0 with available balance of 150k.
    I have since used 65k of it for an IP deposit and expenses (the IP loan is a separate loan altogether).
    Current balance -65k, available balance 85k

    From my current understanding after reading some of your posts, I would be better to split this investment loan so that I would have 2 investment loans, say A and B.

    A is to pay ongoing expenses of the IP
    B is to invest in another IP OR shares.

    Is this correct?
    If so, is there a rule of thumb of how much to split?

    If A is used to pay ongoing expenses of the IP, the available balance will eventually run out one day, can I just simply transfer the money from offset to this investment loan account to top it up?
    Or better if I ask the bank to increase the loan balance / limit?

    Cheers
     
    Last edited: 5th Oct, 2016
  4. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    You should seek specific tax advice.
     
  5. LaoBan

    LaoBan Active Member

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    I have.. In fact, this setup was suggested by my advisor.
    The fact that you mentioned this setup has issues worries me, so any guidance is very much appreciated..
     
  6. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Was the advisor a tax lawyer or tax agent?

    See tax tip 1 for some potential issues. Did you borrow and pay directly from the loan account without any detours?
     
  7. LaoBan

    LaoBan Active Member

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    He's a financial advisor, but also registered tax agent.

    I had a look at tax tip 1 - Parking borrowed money in savings (incl. offset) account, but not sure how it applies to my situation (?).

    The only time there was money acquired from establishing the investment loan in my offset account was the very beginning, when the bank put 85k (this was the equity from my PPOR) in my offset account.

    A day after that, I transferred the whole amount 85k from my offset to the investment loan (transaction #1) and also the rest of the balance of 65k from offset to the investment loan also (transaction #2).
    The investment loan then becomes $0 in balance, but with $150k in available balance (ready to be used to invest).

    Are you saying that the bank should not put the 85k in my offset account, but they should put it straight in the investment loan, so that in the beginning the investment loan's balance was -$65k (this was a split amount from my PPOR home loan) and the available balance was $85k?
     
  8. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    How did ypu pay from your loan?
     
  9. LaoBan

    LaoBan Active Member

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    Most of the time I pay the IP-related expenses directly from the investment loan via direct debit / bank transfer or BPay.

    There were few expenses, e.g. landlord insurance and depreciation report which I paid using my personal credit card first, then when the statement arrived at the end of the month, I transferred the exact amount from my investment loan to the credit card account.
    I always pay off the credit card's closing balance every month and never use the investment loan to pay off non-IP related (private) stuff (I use my offset account for that).

    From what I understand in one of your Tax Tips (paying expenses with credit card), it is mentioned that as long as the closing balance is paid off every month so that no interest incurred, this should be fine.
    Please correct me if this is not right.

    Can you see any other (potential) issues with the setup?
    While I want to maximise tax deductibility, I want to ensure I do it in the legal way. That is ultimately my goal.

    Cheers
     
  10. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    I can't comment on your set up without going through everything, but as long as you are not mixing loans and not allowing detours you may be fine (not considering Part IVA)

    I hope your credit card never had any other purchases which were private during the month when you borrowed. Otherwise it would be a mixed loan and you would have issues - though unlikely an ATO auditor would look at things that minutely.

    I hope that I didn't write this as it is wrong.

    As long as the only expense is investment related, at any one time, then this could possibly be refinanced.
     
  11. LaoBan

    LaoBan Active Member

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    Fair enough Terryw. Thanks for your pointers!
    Cheers
     
    Terry_w likes this.