Splitting the PPOR homeloan and deductibility

I just got advice from an accountant that I am unable to have my tax deductibility if I split my PPOR homeloan in order to use the split as a deposit for another investment property as it would be mixed purpose and I couldn't pay down the PPOR loan without it affecting the investment one. Even when I insisted it would be a separate loan (with separate bank numbers) etc. He said I would have to pay it off in its entirety first, and then I could do it.

I was debating the merits of using an offset v redraw. I figured if I piled everything into the main loan, I could split it sooner, as otherwise, I would have to wait for growth, which may not happen. I do note Terry's advice to put everything into the offset in his ideal loan structure, but this is not going to be a rental in future.

Did something change? Did he misunderstand what I was wanting to do? Did I misunderstand him? Or (hopefully) is he just wrong?
thanks

 

Yes

 

I am a tax guy and can confirm you need a new accountant.

 

Well that is making me feel better. Thanks! I was wondering if it was maybe because I was putting money into the loan, and that was making the difference. Couldn't see why, because I've done that previously too.

I lolled at that response, Terry. Yes, I suspect as much.

 

He's wrong. Time for a new accountant?

It can be a mistake to assume that accountants are across all aspect - some are definitely better than others.

I had to teach mine about a tax variations once. He was no longer my accountant after that.

 

Actually perhaps he is right and you misunderstood him. He says you have to pay down the loan first. This is correct.

This is how to do it so that it is deductible.

Split the loan first
Then pay the new split down to $0
Then redraw (= borrow)
Apply the redrawn money to the investment, without any detours.

Now all of the interest on the new split solely relates to the investment. All the interest on this split would then be deductible against the investment income (assuming not shares that don't pay dividends).

Note that some banks will close a loan if paid down to $0 so you may have to pay it down to say $100 and then redraw. It would then be a mixed purpose loan but the non-deductible portion would be insignificant - $100/$100,000 for example is bugger all.

 

In the context of the OP though, it sounds like he's saying he needs to pay the whole loan off.

If he didn't pay it back, how could he use it as a deposit? There's nothing to use if you just split an existing loan.

 

I would have thought that goes without saying, but it would explain the advice I guess.
Thanks for the bank tip. Would save me potential issues down the track.

The only way I can think of is if they paid down a portion - like in Terry's example of leaving $100 in the account. Barring a reason like preventing the closure of the account, I fail to see why any rational person would do this.

 

@Ezzo - this is one way that we debt recycle PPOR debt into deductible, splitting the loan, paying it down and redrawing it. There's not usually any issue with this, other than the odd bank where the loan will close automatically.

If this is done, the loan is deductible when the funds are redrawn to buy an IP, or income-producing shares etc.

Is this what your accountant is saying, or is he saying the whole PPOR loan needs to be paid off?

 

My strong impression was that he was indicating the whole PPOR loan, saying it was mixed. Even when I mentioned the separate bank numbers for the two loans, he was saying I couldn't pay off just the PPOR side of things. I mentioned the two separate loans a few times, and its purpose, but no dice.

Maybe he is thinking I want to get one massive loan for the two and then split it afterwards?

 

It does seem like there's been a miscommunication somewhere along the lines...

 

Just copy and paste my bit above in an email to the accountant and ask him if he thinks it is ok.

 

So many accountants either have no idea about property tax issues or are just appalling communicators. The accountants seems wrong. Simple. What else ??

Dont get into an arguement with the accountant as they may be too stupid to know what they dont know and want to charge you to learn.

Mixed loans arent illegal or even non-deductible. They are best avoided BUT....A calculation to determine the two purposes needs to be done. Thats all. Best practice would be to then split the loan....No drama.