Potential Loan structure

Hi all,

Asking this for a friend as he asked for my inputs and I want to give him the correct opinion.

His broker suggested the potential.loan structure for refinance.
Existing PPOR (say Loan1) is $250k. Refinance this to 450k to get equity of $200k.
Pay this 200k into the loan offset account.

Buy another property borrowing 400k (Loan2) + use equity funds 200k from the offset account.Move into this property and convert the original PPOR into investment property

Question : Can he claim interest tax deduction on the $450k?
I think only on 250k as this was the original loan amount and 200k is not used for income producing asset.
Please correct me if I am wrong.

 

No, only the existing loan of $250k is tax deductible.

It's the usage of the money that determines if the funds are taxable or not.

Since its used for OO purposes then obviously you can't claim anything.

 

For loan 1: Is it a single loan of $450k that's being proposed, or is it a split loan of $250k & $200k ($200k for the equity)?

In most cases I'd recommend the split loan option. Setting it up as a single loan means that some of the money will be used for an investment property and some for an owner occupier property. Very different purposes that will create 'contaminated loan' and likely become a tax problem.

Brokers can't give tax advice (me included), but this is fairly basic stuff. If the broker is suggesting a single loan facility, they're making a fairly fundamental mistake.

 

Thank you. Your answer aligns with my thought process.

 

Single loan of 450k with the equity money sitting in the attached offset account.

 

That's a terrible structure.

The $250k might be tax deductible, but not the full $450k. Over time the deducibility would be eroded and it wouldn't take much to loose the deductions on the $250k as well.

 

Thats not smart. So you will offset BOTH loan uses. Every dollar in the offset will reduce BOTH the non-deductible PPOR and the deductible new IP interest. Any future changes to the loan will also impact both uses rather than just one.

Some brokers just dont get it and it was lazy on their part. They dont knw property well.

Ask them to fix it and split is now while its easy

 

Time for my friend to change the broker. I am going discuss these inputs and ask him to reach out any of you.

Thanks again.

 

Thats what you call lazy structuring.

 

It's not even lazy. The extra work to structure it property is about 2 minutes. I'd call it ignorant or uneducated.

 

I was trying to be nice about it, but hey you reed my mind.

 

A lesson for all brokers. When a client tells me a broker is lazy and suggested consolidating loans in place of splits I then suggest a different broker. It happens a bit (too often for my liking). Then usually the client queries the broker and gets told it wont matter. It does. I find it easy to convince them that the broker is out of their depth and ask what else they may get wrong.

 

Conversely when the broker does the job properly and educates the client as to why and instructs the client to confirm it with their accountant, the broker ends up looking really good and the client feels like they dodged a bullet from the ATO.