More...About blended loans

DOMJAN v FC of T, Administrative Appeals Tribunal of Australia (ACT), 05 August 2004 is considered a case of interest (no pun intended) when discussion about blended loans comes up. I had reason to revisit this AAT case recently and it provides some insights into reasons why taxpayers should not blend loan money with ANY other money (including other borrowed money). In Domjan blending become a mess...and the ATO and the AAT diligently considered all the arguments and reconstructions.

Transcript of the appeal is summarised here :

The importance of not blending loan proceeds with ANY other money is demonstrated in the details.

The case also highlights the degree of diligence the ATO and AAT will go to for what can be trivial sums on first review. In the Domjan case the scheme to have the PM classify the vanity replacement as a hot water repair was detected by the ATO. An attempt to access a $165 deduction was investigated and diligently explored.

 

This case needs to be read and understood by the banks and institutions who willy nilly disburse borrowed funds where ever they choose or what ever is easiest which usually means placed in a personal offset account, there fore contaminating the loan by mixing personal with investment funds.

 

Spot on. The real solution for borrowings is to ensure all new loans are split and a new offset created for the new loan. Treat it as a temporary facility and hold the new advance until it is used. Then close that offset.

 

We set up dedicated "investment offsets" with specific instructions of what funds go where and banks still place it in the personal offset. Doesnt help when this is being done offshore as well.

I have had "complex" deals be abandoned halfway through with some funds disbursed and others in limbo which then can take many phone calls and emails and days and days to rectify. Got a great PA who takes care of all that now.

The joys of dealing with banks

 

What I now advise clients (who want to park the borrowed money) is to remove all funds from all accounts with that bank. Wait until settlement, and then put the funds back. This way if the borrowed funds are deposited into the wrong account they are not mixed.

 

@Terry_w if funds are parked in offset and client then takes those funds and puts them back into the loan as redraw essentialy reducing the loan to zero. Then they redraw and place it back into dedicated IP offset will the funds in the offset be still considered as savings if used for investment purposes?

 

Once money is paid back into the loan it starts again. You can fix mistakes.

e.g. $90,000 IO set up all new money under a new split. NAB mistakenly (?) put the borrowed money into an offset account containing clients other money. Its a mess! Interest won't be deductible in full

solution: pay down the $90,000 loan to zero (or $100, taking care not to close the loan) and then reborrow it by redrawing into a clean offset.

When this won't work
$90,000 increase on top of a $110,000 loan making it $200,000 in total. $90k paid into offset account with other cash.

since the $200,000 loan is mixed portion putting $90,000 back into the loan will make it worse as it would be mixing the loan even more.

Solution for this - split the loan first and then pay off the $90,000 stuff up loan.

Keep in mind the issues surrounding parking as outlined in tax tip 1.

 

I was thinking along these lines;

1. 100k borrowed in a seperate loan split.

2. 100k disbursed to linked offset dedicated for above split with no other funds in it.

3. 100k placed back into homeloan account available as redraw, reducing to zero or close to so loan doesnt close.

4. 100k funds are redrawn and parked in dedicated offset.

5. 100k sits in the offset for say 2 months whilst client finds a property.

6. Property is located and funds in above loan split are used for deposit plus costs for new property purchase.

Is the 100k funds tax deductable with the above process or still considered savings?

 

The answer is 'maybe'. see tax tip 1.

I would suggest the client put the money back into the loan the day before using it by borrowing it again. this would make the connection between the borrowing and the use shorter.

 

Gotchya. Will read tax tip 1.

Cheers.