Optimal Loan Structure For PPOR + Granny & Investment Unit

Hi All,

I’m in the process of buying and was talking to someone who clue’ d me in a bit on debt recycling, this is now something I want to do. I was hoping you may be able to give me some pointers on the best loan structure / strategy for me.

I’m selling my PPOR, 815k, ~150k owing on the loan
I’m buying a new PPOR, 930k value, with a granny flat.
I have an investment property, ~690k value, 540k owing (390k in fixed rate till sometime in October this year).
I have approval to borrow 300k extra for the purchase. The bank said its best for me to leave the investment at the moment because their new policy is 50% lvr on investment loans, and it would up my interest rate to the investor rate.

So far my plan is to:
1. Determine the % split for the granny flat (can this just be a google maps floor area, as if it was a separate dwelling? I don’t have internal dimensions also main residence is 2 story.)
2. Have the new loan split according to that %, with further splits on the main residence to be able to debt recycle.
3. The loans will be 1 year Interest Only and I won’t initially rent out the granny flat but will use it for 2 months or so to establish it as part of the PPOR.
4. After the 2 months I will assume the 930k*x% as the initial cost base for CGT on the granny flat, take any interest on the granny flat portion of the loan from then on as deductable, and rent out the granny flat.

Can you see any problems or missed tricks?

Thanks!
Luke

 

Hi Rolf,

Thanks for the reply.
I am not opposed to seeking tax advice however I’d prefer to have some idea of what options should be looked at so that I can be confident that all possibilities are covered. (enter a forum with some experts and learn from the experience of others). I am also willing to read up on legislation and other sources (like tax rulings and private binding rulings) to further my knowledge.

Seeking tax advice is easy to do, following your suggestion I have been seeking. After some calls I would add that it’s important to get Good tax advice as so far I have not been able to find someone I trust. After being transferred a few times one expert told me that sheepishly that it 'may' be possible to split a loan based on floor area, or that loan splits may be more hassle then they are worth. I’m looking for specific and accurate information, rather than a conservative “easiest way to get some of the benefits”

I wonder if anyone has any recommendations where to get good property related tax advice/planning in the Illawarra region? I feel that if I’d just booked an appointment with the company I just spoke with, then I would have blown $400 without getting relevant advice. I’m happy to spend $400, but would like to be confident that I would get advice that is both correct, and optimal for my specific situation.

Alternatively my plan would be to do my best to get it right and document my decisions based on the information available, from what I read as long as decisions are made with care and are reasonably arguable I can't get in too much hot water if I’m wrong.

 

Have you considered a refinance to a lender that will allow you to go to 80% in order to free up equity, serviceability permitting?

Which bank is it BTW?

 

Any accountant worth their salt will be able to determine how much to allocate to the GF and the main residence. Have a chat to @Ross Forrester - he'll be able to help. Once you've got specific advice regarding exactly how much needs to go in each split, you can speak to a broker who can implement with the correct structure and product. There's some loan products that are especially good for this, so get advice rather than assuming your current lender is the best one.

 

Where loan funds are used satisfy a dual private and business purpose, section 8-1 of the Act requires that the interest incurred be apportioned to the extent that funds are employed to produce assessable income.

In the case ofRonpibon Tin NL v FCT it was held that the method of apportionment is a question of fact, requiring a fair assessment of the extent to which the outlay relates to assessable income. In the majority of cases, this has translated to the amount of assessable income derived as a result of the borrowing but not necessarily.

As the facts of each case are slightly different the method of apportionment can be different as well depending on the facts. So to start with you will need an objective review of the facts associated with the property and then consider the different approaches.

The advice you receive, or prepare yourself, should be referenced to the supporting documents and not simply avoid the facts by detailing a list of assumptions.

 

The granny flat and the main house are one asset so borrowing to buy this property is you borrowing to buy one asset. if part of that asset becomes income producing you will be able to apportion the interest and claim a % of it that relates to the granny flat.

Splitting the loans up initially is a different story. You could split the loan so one loan relates to the granny flat portion and one to the main house portion. but would the interest need to be apportioned on each of these or could you claim the interest on all the loan against the income from the granny flat? I don't know if there are any ATO guidance on this question. I think the answer would be no, and that it has to be apportioned because you are buying one asset. It is a dual purpose asset.

if you were building the granny flat it would be a different story. Because you could borrow to build the granny flat with that interest relating solely to the granny flat income.

Get some tax advice and consider applying for a private ruling.

 

So you are buying a $930K asset but reluctant to spend $1k on tax advice? Hmmm..

I can tell you that you are potentially exposing your PPR to capital gains tax, the bank you are with is not right for you (given they are only doing 50%LVRs) and potentially the loan structure the bank is providing you may be incorrect..

 

Bear in mind that the PPOR wont ever attain a 100% CGT exemption and the 6 year absence rule doesnt apply to a GF situation as you describe if its part of the main dwelling initially. The % of land area attributable to the GF AND the time when it is available as a separate residence will both affect the CGT exemption forever. But there may be minor deductions for the GF
- % interest
- % rates
- % water if not metered separately
- % elect if not metered separately
- % insurance (buildings)
- 100% of direct expenses for the GF eg LL insurance
- QS deductions for the GF
- R&M expenses etc directly attributable to the GF (You cant claim mowing etc if you do it !!)

The loan issue is irrelevant really as the % apportioning rule applies anyway to interest and time - Thats not a biggie. From day one (or day 61 it doesnt matter) this CGT issue means its CRITICAL that you diligently capture and records all non deductible ownership costs for the main residence since they will assist to inflate your CGT costbase that is used to calculate the CGT gain if its ever sold. Thats a good thing !! So you may claim a % deductions for rates, apportion insurance etc and the part that deductible against GF rent is easy and then the non-deductible is a main residence ownership cost you record and maintain a long and diligent record forever.

Its all explained in a tool we give all clients as part of the tools we share. ALL property owners should maintain CGT records and your example is even more reason to do so. If you dont do this you WILL overpay CGT later.

A GF in NSW that is attached with your own residence doesnt attract a land tax issue. I often find people who worry about that.

 

Thanks so much for the help! I will get tax advise ASAP as I will need to sign loan documents very soon. To answer some of the questions:

Loans;
I am with AMP on the AMP First home loan product. I am pretty happy with it and I think my serviceability is the limiting factor rather than the lender as online calculators line up with what AMP tells me. The 50% lvr is only on investments and is a recent policy change, I could try for an exemption from it if I had to. I will ask them more about his next time I call.

Granny Flat %;
Do you think this would be suitable? https://www.dropbox.com/s/c7tuw8zfxxfoxja/Split Calculation.jpg?dl=0
To clarify the image, the extra part added to the total area is a second level, and the extra part added to the granny flat area is use of the pool.
Should I round it to 20% or 19% or use 19.5%?

Loan Split;
My thoughts were that a dual purpose loan is analogous to a mixed loan, and that it was reasonable to arguable that the split was the same as line of credit sub loans mentioned in TR 2000/2.Do you think this is valid? I would like a PBR but my only concern is that they may be overly conservative with things that may be valid but are different to the norm, because it’s easier and it will wind up on their website.

CGT;
I thought I could manage CGT by getting valuations at the start and end of any period where the Granny Flat was rented and applying the relevant %. Looking more into it, is seems standard to do as you say, keeping track of all the ownership costs. Is this the only way or just the way that is commonly used? it sounds onerous and I would much rather avoid that.

In the long term having a mixed loan and keeping track of all my ownership costs will make things a lot more complicated then I had envisaged. Yes, I will get tax advise =)

 

no

 

Surely this will work?
IT 2661 - Income tax: apportionment of interest where money is borrowed to fund the purchase of an asset part of which is used for a business purpose and part for a non-business purpose (As at 28 November 1991)
If the purchase is 930k and I can borrow 300k and assuming a 20% allocation for the GF, then reading IT 2661, I can say that a split of 186k would be for the GF and I can allocate the new borrowing to it, using any funds from the sale of my PPOR for the new non-income producing portion of the loan.

 

Look for Cranberry's case.

 

Just looked at that link and it is not the cranberry case, but Carberry which this IT concerns itself.

Note that a partnership was involved in this situation and it was the partnership which was deemed to be the borrower for the loan used to acquire the business premises which were on the same time as the house.

Seek tax advice