PPOR to Investment - Redraw Tax implication

Discussion in 'Accounting & Tax' started by igino, 4th Aug, 2018.

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  1. igino

    igino Member

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    Hi many knowledgeable forum members,

    Is there any tax guru around here that can provide some insight. I couldn't seem to get a straight answer from my tax advisor.

    I have moved out from my PPOR due to changes in our circumstance, I would be getting tenants to the property in the next few days. When I set up the loan account my focus was just to pay it off as quickly as possible (which means it has significant redraw amount at the moment - which is not a good tax position that I would like to be in, the bank does not have an offset account). Which one of the below option would be acceptable to ATO to allow me fully deduct the interest payment in the following financial year.

    just for the completeness of the scenario, I have only made one small redraw (~2k) since the loan conception ....was just a bit short on our cash flow to pay off credit card.

    Option 1: Before I start with the new tenant, can I pull out all the big portion of the redraw fund and increase the loan amount again to make me in more favorable tax position while maintaining liquidity?Technically, that is when the property becomes an investment and that redraw amount is used to generate that income stream? Hence, the redraw would be used to generate the new income albeit from the same asset?

    Option 2: Another option I am thinking of is to transfer it out to a share account that I use to purchase shares. Would that be satisfactory? Do I need to spend every single cent to purchase shares to ensure the interest from the redraw account is fully deductible?

    Option 3: My wife is a sole trader and she needs of some fund to kick start another business due to our relocation. Would putting the funds into her business account be acceptable to have fully interest deductible for FY2019 tax report? Since I would be investing in that business?

    Thank you for for everyone thoughts.
     
  2. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    Im not a tax guy.....................

    A redraw is a new loan so

    option 1 , dead in the water

    option 2 - maybe

    Option 3 - is the mrs business going to be paying market rate for the $ ?

    ta
    rolf
     
  3. Mike A

    Mike A Accountant Business Member

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    Option 1. Increase loan for what .
    Option 2. Purchase shares ?
    Option 3. Lend to wife ?

    What you trying to achieve ? The interest will generally be deductible once it becomes an ip apart from your 2k mixed loan.

    You want to redraw funds. Look at purpose to which the funds are put.

    Should have had an offset attached to that loan from the beginning. Horse has bolted there
     
  4. igino

    igino Member

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    Well basically I would like to maximize the tax deduction from the property - was never intending to convert the house to IP due to its location .....but we had to move a bit sooner than expected.

    As mentioned - the bank that I am with does not have any offset arrangement to this very date. No issue with my other IP accounts as it is just pure investment.

    The medium term plan is just to wait it out and use the six years rule to offload it as soon there's a bit of movement around that particular area. Currently, pretty dead.

    Any other creative suggestions would be welcome?
     
  5. igino

    igino Member

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    a new loan...so if I refinance it with the same bank (cost is very minimal)...obviously take out all the redraw first before hand - would that work?
     
  6. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    None

    If it is just $2k just leave as is a apportion the interest.
     
  7. igino

    igino Member

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    As in keeps calculating monthly to break that minuscule non-income generating interest?

    well the redraw is pretty much as much as the balance (less 3k), effectively I can pay it off and close it anytime I want - that was the original plan.

    However, since the property is now going to generate some income I need to reverse this redraw somehow. ...once again did not have the offset account selection from the bank back then.

    I would sell it before the six years is up but even the selling agent does not really want the property yet at the moment (the market is that dead)...she strongly recommends to rent it out first.
     
  8. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    You don't need to 'reverse' the redraw.

    Selling it doesn't really change anything. If it is mixed you just claim a portion, if not mixed and the loan relates to the property you could claim the lot.

    If you redrew $2k and the loan balance was $400k you could still potentially claim 99.5% of the interest.
     
  9. igino

    igino Member

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    The problem is that the redraw amount almost pay off that 400k and leave me with $20 mothly interest payment. Hence, all the extra rental income would not have much to offset it when comes the tax time.

    Plus it would be nice to have that extra liquidity for othe non claimable expenses. It wasnt an issue when it was ppor but would be from next week.
     
  10. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    So you have paid off an extra $400k?
     
  11. Mike A

    Mike A Accountant Business Member

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    creative suggestions....sure....i can sell you a property in rutherglen for 400k and you should get an interest deduction for 400k..

    property is only worth $100k but we arent related parties..

    you get a tax deduction on the interest...might not be a good investment though

    the fact is you CANT reverse what you did. if you purchase another investment and redraw funds it is potentially deductible. whether that is a good investment or not is between you, and if applicable, your financial adviser.

    i know your problem. the property is now an IP and you will have all this additional income coming in and nothing to offset against it. If you had kept the loan on foot you wouldnt have this problem. Yes it is a problem.

    You could sell to a unit trust, related party etc but then you have stamp duty to consider and maybe not even worth it anyway as that person might be on a lower income. Sell to a unit trust and issue units to yourself ? I think Part IVA would apply to that particular arrangement.
     
  12. igino

    igino Member

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    paid 'extra' almost equivalent to the loan balance..... the actual balance is not 400k (that's just to follow through the previous conversation to make it easier to illustrate the matter here)

    I have been waiting for some dividend accumulation from my shares portfolio to expand my portfolio - so thinking that option 2 if I redraw it to my account and then transfer it to my share account would that satisfy ATO to have a deductible interest from the taxation point of view.

    I wouldn't be able to transact it all in one single transaction though. I have been looking ATO ruling on this but couldn't find one that actually spell this out.
     
  13. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Interest would only be deductible if you borrow to invest.

    Redrawing to accounts won't help.
     
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  14. marty998

    marty998 Well-Known Member

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    Cut nose, spite face.

    Be happy that you are making a profit...? Why lose money just to get a tax deduction?
     
  15. igino

    igino Member

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    I am more than happy to make a profit - just trying to manage my tax affairs.

    There are only two things you cannot avoid in life Death and Tax. Since I cannot do anything on the first one, I am trying to do something on the second one.

    Just to be clear it's not solely only for the tax deduction....I would like to access that fund again for other non-income generating expenses. As I am not as liquid otherwise...Either that or start selling shares portfolio.

    I found the ATO ruling on this specific matter.....The use of the fund is what determine the interest claim-ability, a high interest bank account is still part of an investment isn't it? A risk free and low return but it is still an investment vehicle.

    Any thoughts?
     
  16. Paul@PAS

    [email protected] Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Thinking through the issue of drawing down a loan at say 3.90% and investing that at 2%....
    You will lose money. Thats the scenario for risk free cash. Now increase the risk and invest in something where the market can crash. You could end up with a loan of $10K and a investment worth $6K.

    Sure its tax deductible. So instead of losing $10,000pa you will lose $7,000 after the improved tax refund to be risk free in a high interest bank account (whatever that is !!)

    And dont assume all shares you buy make a loan deductible. They dont ! t

    Losing money doesnt help you repay the loan either.
     
  17. igino

    igino Member

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    Thanks for the reply Paul - much appreciated. Can you please elaborate on the point above?

    Whats the determination if one share is deductible but the other on is not.
     
  18. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    expectation of income.
     
  19. Paul@PAS

    [email protected] Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Shares which produce income (dividends or other forms of income) allow the interest on the purchase cost to be deductible. If that share has never paid a dividend and there is no expectation of one the interest cant be claimed. If you buy a portfolio and some are not income producing but held for changes in value you will have a blended loan mess and likely ut all the deduction for interest at risk

    Its like buying a property. If it produces rent the interest should be deductible. If you leave it vacant its not.