Refinancing splits affecting deductibility

Discussion in 'Accounting & Tax' started by James_isconfused, 10th Feb, 2020.

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  1. James_isconfused

    James_isconfused Member

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    Hi all,

    Thanks in advance for any ideas from those who’ve been there done that:

    If I was to hypothetically refinance a loan with 2 splits:
    Old split A: $100k owing $150k limit (investment)
    Old split B: $70K owing $100k limit (private expenses)
    And the bank insisted on drawing down the entire amount on settlement and depositing the surplus into my transaction account I’m guessing this will result in a mixed loan:

    New split A $150k owing
    New split B $100k owing
    $80k depositing into transaction account. Even if I transfer the surplus back into the correct accounts I’m guessing this is still a problem?

    Short of going to a different bank has anybody got any ideas on how to make this kind of situation work?

    If I could get them to deposit the money from each split into a separate (empty) account and then immediately transfer it back into the appropriate loan will that be good enough for the tax man?
     
  2. Jess Peletier

    Jess Peletier Mortgages, Finance & Property Strategy Aust Wide Business Member

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    Hi James, ideally the loan proceeds would go into an empty account. There's no issue with that.

    If it goes into an account with your cash in it, it's not ideal but in reality unlikely to cause too many problems as long as you can show the paper trail of the funds once you move it back - even though it's technically "wrong".
     
  3. JasonC

    JasonC Well-Known Member

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    Can you get the bank to create three splits?

    1. 100k
    2. 70k
    3. 80k

    then pay the extra drawdown funds back into split 3 (or offset against split 3).

    Jason
     
  4. Terry_w

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

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    The issue is you are borrowing extra money and it has no use so mixed loans will result.

    Jason's suggestion sounds good.
    If you want to use the $80k for future investment and future non-investment purposes you could split this now
     
  5. Terry_w

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

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    Borrowers should always get tax advice to avoid potential issues:

    Tax Tip 1: Parking borrowed money in an offset account Tax Tip 1: Parking borrowed money in an offset account
     
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  6. James_isconfused

    James_isconfused Member

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    Thanks everybody.

    @JasonC that sounds like a solid plan, I do have a $4000 split that was for a share purchase so I will lose the deductibility of that as they have a minimum split of $20,000 but I can live with that if I don’t lose the investment property split!

    @Terry_w thanks for the link I’ll have a read. And yes to tax advice-I didn’t realise how complicated a simple refinance could be. It’s also tricky finding somebody as multi qualified and interested in property as you are up north!
     
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  7. James_isconfused

    James_isconfused Member

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    Hi @Terry_w and @JasonC,

    So after going to a broker and being assured multiple times that a different loan product could have the surplus funds deposited directly into multiple accounts, and therefore recreating the income producing and non-income producing splits I had before the refinance (including available redraw), the loan docs have just come through and surprise surprise all surplus funds from 4 splits must be deposited into one loan or offset account. :( I have a mix of IP, PPOR, shares and private expenses all segregated into separate splits.

    Option 1: is to follow Jason's original advice and get the splits adjusted pre settlement as per his suggestion for the example above, Broker is against this idea and is claiming it will require a full reapplication, even though it will result in the same total loan amount and the same number of splits/accounts just with different distribution of limits.

    Option 2: is to let the loan settle with all surplus funds deposited into one offset account, then immediately split the investment split into 2, the original amount and the "surplus". I can then pay the "surplus" split down using money in the offset and redraw to pay investment expenses in the future. Reading through tax tip 1 and TR2000-002 and seeing as the new loan is IO I *think* this should be ok.
    For eg sake:
    Step 0 Old loan:
    IP= $100k owing $150k limit
    PPOR= $70k owing $100k limit
    Step 1 REFINANCE and stirring the urine into my tea
    New loan:
    IP= $150k owing/limit
    PPOR= $100k owing/limit
    Offset= $80k
    Step 2 SPLIT
    IP=$100k owing/limit
    IP expenses=$50k owing/limit
    PPOR=$100k owing/limit
    Offset=$80k
    Step 3 pay down split
    IP=$100k owing/limit
    IP expenses=$0 owing $50k limit
    PPOR=$100k owing/limit
    offset=$30k

    I will obviously need to do the same for the PPOR split as well in case we ever move out and will not leave any money parked in the offset but the above gives you the gist of it.

    Option 3: The broker has said that if I get the surplus deposited into 1 offset then his team can deposit the money back into the correct loans immediately after the settlement so that the loan splits are as intended (ie $100k owing with a $150k limit). I'm concerned that this will show on my first statement as a drawdown and then repayment, which I imagine is as bad as if I just immediately redeposited the funds myself=mixed loan.

    The broker is looking into whether the bank will split the the surplus funds into more than one account, but failing that I was wondering if I could trouble you for some general pointers? I really appreciate the knowledge that's shared on this forum, I know it doesn't replace proper tax advice but it might stop me tearing all my hair out tonight and guide me in the right direction!

    I should have taken Jason's advice at the beginning, but thought I'd found a way to keep deductiblility on a small amount used for shares that's well below the minimum split size-but this stuff never ends up being that simple!!
     
  8. Terry_w

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

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    Did the person advising you have tax qualifications?
     
  9. James_isconfused

    James_isconfused Member

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    The broker? Not as far as I’m aware.
    And when I say Jason’s advice I mean his suggestion above, poor word choice.