Tax complications, (need help)

Discussion in 'Accounting & Tax' started by Jonathan C, 8th Aug, 2018.

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  1. Jonathan C

    Jonathan C Active Member

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    hi guys,

    Currently, I only have one investment property (apartment) and an investment loan which I made a lot of extra repayment into the account. Most of my saving is in that loan too. Within less than a month, I have to settle a new apartment for me to live in (owner occupied). I was told that if I redraw the money from the current loan to settle the new property that is not for investment, I won't be able to claim tax on the interest from the loan any more. Is that true?

    The relevant details of the first loan/property

    • It settled in October 2017, the loan amount is $300,000
    • So far, I have put about $250,000 (as extra repayment) into the account. Current balance is less than $50,000
    • Never do refinance on this one. So the amount available for redraw is the amount I paid as an extra so far.
    • I need to redraw about $100,000 to settle the 2nd apartment soon. It's an off-the-plan apartment which is about to settle very soon.
    The current home loan that I have on the first property doesn't have offset account, so I just pay extra and pay lump sums (my saving) into the loan account. Because I want to reduce the interest on that loan. My first question is, even I redraw from the extra money that I paid into the loan (I didn't do any refinance or increase the loan so far), would that still cause the tax complication?

    So far, I was given 2 possible options

    Option #1
    Settle the 2nd property as an investment. This would be the simplest way. The money that I have to redraw from the first loan (I need $100,000 to settle the 2nd one) is used for investment. So I still be able to claim tax on loan's interest from both property.

    Option #2
    Settle the 2nd property as an owner occupied. Take the benefit of first home owner grant and live in the 2nd apartment for about 1 year. After 1 year, turn that apartment to investment. During that one year, I won't be able to claim tax on the loan's interest at all. But after I change to the investment, I will be able to claim tax on the interest on both property again.

    I wan't sure about the option #2 but it seems to be the best return for me. Do you have any other ideas?
     
  2. Ross Forrester

    Ross Forrester Well-Known Member

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    Yes.

    Yes

    Are you telling the bank about your strategy for option two? How are you getting the FHOG if you own a home.

    Only a tax advisor has given you the two options becaus that is clearly tax advice - get the advisor to expand their advice.

    And maybe get the loans split so you can trace the use of funds. It seems like you are blending loan purposes which can ultimately create a mess like the lack of your offset (but different).
     
    Last edited by a moderator: 8th Aug, 2018
  3. Ross Forrester

    Ross Forrester Well-Known Member

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    Whoops somehow my answer is stuck in your quote. Not sure how that happened.

    Tricky.
     
  4. Jonathan C

    Jonathan C Active Member

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    The first property I bought was an investment apartment in Brisbane.

    and the second one will be in Brisbane as well. And in QLD, as long as I never move in to a house that I own, I can still claim the FHOG.
     
  5. Jonathan C

    Jonathan C Active Member

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    I am not sure what you mean by "split loan". But when I settle the 2nd property, it will be the 2nd loan as well. I am not increase the first loan to buy the 2nd property.
     
  6. Ross Forrester

    Ross Forrester Well-Known Member

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    Oh good. I thought you were drawing down $100k on the first loan to acquire the second property.
     
  7. Mike A

    Mike A Well-Known Member

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    you will have a mixed loan on the loan still. 50k outstanding ? you will redraw $100k. you are going to need to apportion the payments to that account between deductible and non deductible.

    think that is why @Ross Forrester is suggesting a split so it doesnt get messier.
     
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  8. Terry_w

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

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    This would have to be the most common tax mistake for investors I think.

    At 5% pa this will cost you around $12,000 per year in lost deductions roughly.

    Here is a list of 11 strategies that may be worth considering

    Strategy: 11 Strategies for when you move out of the PPOR and keep it Strategy: 11 Strategies for when you move out of the PPOR and keep it
     
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  9. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Shame you hadnt used an offset when you took out the loan originally. That would have allowed the extra repaymnets to reduce the interest but now you could have used the offset cash instead of redrawing. This would have allowed the property loan to maximise its deductibility. Too late. A lesson for others ??

    Important that the new loan (redraw) be a new split. ie a new loan account. This will allow you to always identify which loan is for which purpose. This avoids a blended loan which could affect the deductions arising from the $50K. Suggestion - Get a offset for the new loan !! That way extra savings can be parked there and reduce interest but one day if the home becomes a IP again you will have maximised deductions.
     
    Last edited by a moderator: 8th Aug, 2018
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  10. Mike A

    Mike A Well-Known Member

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    5
    50k @ 5% = 12,000 ?? o_Oo_O

    Or you mean from the original loan ?
     
  11. Terry_w

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

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    $250k paid into the loan so if had put that in offset instead and used it for the new main residence would have about $12,500 per year in extra deductions. For many years to come too.
     
  12. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    For many years to come too...

    Thats an important aspect some forget. If the loan was IO that could represent increase tax refunds by $43K over the past 10 years.

    ie $12500 pa x 10 = $125K x say 35% marginal tax rate = $43,750
    Just banking the tax refunds into the main residence would also compound over the 10 years to pull the loan down $55k or more. The $250K used to buy the new home would be over and above this and also save a further $12500 in annual interest.

    And all it took to avoid that was using a property savvy broker who knows better. Not all loans are the same when one broker with sound advice and strategies can avoid a mess by selling the benefit of a offset v's a redraw when the loan was taken out.
     
  13. The Y-man

    The Y-man Moderator Staff Member

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    Fixed ;)
     
  14. Jonathan C

    Jonathan C Active Member

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    guys,

    If I decided to go with the option #1 above. Let both of the property to be IP. would that be the best way to keep to tax benefit?
     
  15. Jonathan C

    Jonathan C Active Member

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    hi Milke, Do you mean splitting the 1st loan as well? Does the splitting mean changing that loan to the loan type with off-set facility?

    If I changed the 1st loan to be a loan type with offset facility, and moved that $250k into the offset account right now, would that help me to get the $100k out to settle the 2nd property for me to live in without affecting tax deductible?
     
  16. Terry_w

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

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    Just claim the interest on the loan associated with the purchase of the property. Don't pay any more off. For the deposit for the new one split the loan.
     
  17. Terry_w

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

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    Split the loan on the first one. Use 20% plus costs from the new split for the deposit on the new one and borrow 80% for the rest. If you will live in the new one get an offset account on the 80% loan or the 20% loan - whichever is the highest interest rate.

    But this won't allow you to magically claim more interest. Borrowing and moving $250k into an offset account won't make the loan interest deducitble
     
  18. Jonathan C

    Jonathan C Active Member

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    hi @Terry_w @Ross Forrester @Paul@PFI @MikeLivingTheDream

    I begun this week with such a headache realising the mistake that is very difficult (if not impossible) to fix. At last I have decided to go with the way that will hurt me the least.

    First of all, thank you all of you so much for the information on this post. It's helpful to me to decide what to do on the 2nd property. And I've decided to rent it out after settlement.

    The estimated amount for settlement the 2nd property is about $80,000 (remaining deposit + QLD transfer duty + solicitor + loan setup fee ... etc). Which I need to redraw this amount from the 1st loan. So by renting out the 2nd property, will keep the loan interest (hopefully from both properties) to be tax deductible. And I will get a 2nd loan separated from the 1st loan. And it will be with an offset account for sure.

    Currently, on my 1st loan, the outstanding balance is lower than I originally thought, it's about $16,000 at the moment of writing this post and the redraw available at $270,000. Not only that, I also made several redraws for living expenses from the 1st loan as well. They all come off from the extra repayment that I made into the loan. I know this is the most stupid way to treat the loan. And I will be sorry for this mistake for a long time, trust me on that.

    From Monday this week after I realise this mistake, I stop redrawing from the 1st loan completely. I know it's too late but at least I don't make it worse. The outstanding balance and redraw availability should not change much. So after I settle the 2nd property, the loan account should be the following:

    • 1st loan, outstanding ~$96,000 (redraw available ~$190,000)
    • 2nd loan, opening balance at $460,000
    I was told that, I cannot touch (redraw) the available $190,000 from the 1st loan as long as I need to claim tax on the loan interest. I believe it's true. They also said I can redraw that amount to invest in the property (such as, renovate the current investment property or buy the new one for renting out ...) if I want the loan's interest to be tax deductible. And I still believe it's true because I cannot find the contradict to that statement.

    From what I explain above, I still don't know the point to split the 1st loan or change it to have offset account. Since I cannot touch that $190,000 any way. If you see it differently, please let me know.

    Another problem, I still need to pay the monthly/weekly repayment to the loan (after settlement, there will be 2 loans for me to pay). I haven't talked to the bank yet if they can stop the future repayment on the 1st loan or not. Since I have $190,000 available, can they just take the money from that instead?

    Or can I redraw the 1st loan every month to pay the 2nd loan. Would that redraw be considered for investment purpose? If it doesn't affect the tax deductible, it would be awesome.

    And that's the way to deal with the property for me. Now, ... my luck does not just end there.

    Remember I said I made multiple redraws from the 1st loan for my personal living expenses? That causes me additional troubles.

    I got the statement form the 1st loan to summarise the total interest on loan that I paid in tax year 2017-2018. It is about $3,800. BUT, since I made that redraws from the loan, I cannot claim the full amount any more.

    Those redraws are about 10-15 transactions per month. Most of them are around $50 - $500. There are about 2-3 transactions that $1,500. I attached the csv file from the loan account so you can see the actual transactions.

    Currently, I don't know how much will cost me to do the tax and to calculate the proportion of the mixed purposed loan yet. Hopefully it won't cost me my legs and arms. Figures cross!

    Lesson learned for me and I already accepted consequences. Last but not least, every replies from you make me feel better, I really appreciate that very much.

    Cheers, :)

    by the way, this is the csv file that I mentioned above.
    trans090818.csv
     
  19. Terry_w

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

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    Is the person that is advising you licenced to give tax advice?

    It is really very simple and I have covered it above.
     
  20. Mike A

    Mike A Well-Known Member

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    As @Terry_w has said all covered in the post. Maybe best you pay for an hour of someones time and discuss it all so you get comfort and know how it should all be handled.
     
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