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Scenario to use extra payment and redraw - Tax deductible

Discussion in 'Accounting & Tax' started by salz, 13th Aug, 2015.

  1. salz

    salz Active Member

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    Similar to payment done through offset account issue:

    Situation:

    I have fixed IO loan for PPOR with Offset account. Offset has 160K available. Loan 500K
    Loan feature:
    • Extra payment up to 20k pa only
    • Redraw available.
    Now I want to buy IP and need 80k for deposit.


    I will pay 20k to Loan and redraw next day and transfer to broker (loan amount back to 500k)
    Deposit 20k to loan again, redraw and transfer to broker
    Deposit 20k to loan again, redraw and transfer to broker
    Deposit 20k to loan again redraw and transfer to broker

    So now I have paid 80K to broker directly from my loan account.

    Question:
    Is this loan 80k could be used for tax deductible purpose?

    What do you say guys? experts?
     
  2. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    No that won't work.

    Can you just borrow on top of the existing loan under a separate split?


    ps why are you paying your broker $80k?
     
  3. salz

    salz Active Member

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    Hi Terry,

    Oops *not broker but to agent and conveyancer.

    But why it won't work? the whole point is I am taking out money from PPOR for investment purpose.

    Cheers
     
  4. Bitsmisin

    Bitsmisin Member

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    It says 20k pa, will this not take 4 years to do?
     
  5. salz

    salz Active Member

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    In actual terms I haven't paid anything in the loan so I guess it should be okay.
     
  6. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    From a tax point of view it won't work because you will have a mixed purpose loan. Once you make another deposit that deposit will come off both portions. So you will be paying down the investment portion as well. I guess it will work partially, but you need to split it first and do it for the full effect.
     
  7. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    I have a way, You could pay the $20K a year to Terry or I and we will give you a tax invoice...Deductible fees for clever advice :) And the new interest would also be deductible. How can you lose ??
     
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  8. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    Split the existing $500k loan into two components of $420k and $80k. Move $80k from the offset account into the $80k split, then redraw it for investment purposes. The $80k split should now be tax deductible because the money has been borrowed from it for an income generating purpose. There's also clear isolation between the deductible and non deductible loans.

    But feel free to give me $20k any time you like. :)
     
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  9. Azazel

    Azazel Well-Known Member

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    That's actually a really good idea. You should be on stage with the other spruikers Paul! ;)
     
  10. salz

    salz Active Member

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    Terry,
    Really good point.....I agree with you that it will be mixed purpose loan when I repay loan but again it is all about calculation what I can claim as part deductible and non deductible loans. I have to apportion it accordingly every time I borrow and repay. I assume it is legal in ATO eyes. I might not be able to claim 80k in this scenario but if I run numbers it will be around 72k instead :)
    Is this could be workaround to pay from fixed interest loans?


     
  11. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    Apportioning doesn't work quite that well. What you've described will contaminate the loan. When you make an extra repayment, are you paying off the deductible or non-deductible part? (The answer is both). This will ultimately errode the tax deductions you would receive had it been properly structured, and the likely outcome is none of the loan will be viewed as tax deductible.

    That's unfortunate, I don't think there's any easy answers there. If you've fixed the entire loan, how is it you have an offset account against it? Adelaide Bank and Heritage Bank (plus a few other smaller lenders) allow offsets with fixed rates, but very few will do it. You might want to verify that the offset account is actually doing its job.
     
  12. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Yes Peter's suggestion will work.

    If you could split the loan and then pay down the break costs would probably be minimal. but may be difficult to do.
     
  13. salz

    salz Active Member

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    Yes Peter, no denying in the fact that when I repay - It will go in both parts (deductible and non-deductible one) but isn't it all about percentage? deductible part is way higher 94% to start with and it can be easily calculated with exact figure over these multiple transactions. Not sure if ATO has ruling once loan is mixed it is viewed as non tax deductible but I doubt about that

    Yes entire PPOR is fixed with Adelaide Bank ..Fixed IO with fully offset account and no fees but such a shonky broker/bank manager.

    If I take out equity then it will another loan application and some fees associated with it. Thinking of taking hit on the pocket and break the loan .. save some money over lower interest and recoup some of the cost and get much more flexibility.
     
  14. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    @salz it's probably a bit late now, but it's always a good ideal keep something variable for exactly this reason. The big downside of fixed loans is you're giving away your flexibility regardless of what the rates do, even when it does come with an offset account. :(