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Tax implications of temporarily putting money into an IP mortgage account

Discussion in 'Property Finance' started by john236, 26th May, 2016.

  1. john236

    john236 Member

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    I'm trying to understand what would happen in this scenario:

    1. Imagine I had an investment property with $200,000 remaining on the mortgage and have been claiming deductions on the interest for a few years.

    2. I then sell my PPOR and temporarily put $199,000 of the proceeds into the IP mortgage account to reduce the interest while I look for a new PPOR.

    3. After 2 months I find a new PPOR and redraw the $199,000 back out of the IP mortgage account and put it towards buying the new PPOR.

    Can I continue to claim deductions on the interest of the IP mortgage? (assuming it's not an offset account)
     
  2. sanj

    sanj Well-Known Member

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    no you can't.

    deductibility is determined by the use of funds not the source.

    effectively you would be paying off your IP mortgage and then pulling cash out of that facility to buy a house.
     
  3. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    Im not a tax guy

    you can claim deductions

    for 1000 loan

    the 199 k redraw is new borrow for PPOR and thus not deductibl

    thats why we have offset accounts : )

    ta
    rolf
     
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  4. sanj

    sanj Well-Known Member

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    200k mortgage is less than 800/month interest.

    if youre on 38% tax bracket we're talking about say $650 after tax benefit or so from this endeavour.

    acounting for the fact that you could probably get 2.5% or so on one of those introductory high interest accounts the net saving would be even less.

    not worth it
     
  5. john236

    john236 Member

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    Thanks guys. Unfortunately, I've already done steps 1 and 2! A silly mistake.
    Is there anything I can do now to undo it?
     
  6. Scott No Mates

    Scott No Mates Well-Known Member

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    Yes, sell the IP
     
  7. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    You have made a serious and costly mistake which cannot be recified. Rolf is correct only the interst on the $1000 would be deductible - approx $50 per year.
     
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  8. dabbler

    dabbler Well-Known Member

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    Some thoughts

    If you have already done this, then you can only get some proper advice, I would be doing lot of talking, also ask accountant to speak to tax office, if that does not work, and your keeping long term, it may be worth selling to your other half and paying the stamp duty.

    If your going to be buying another IP later, you can draw the loan down on this property, to buy the other, it then is deductible.

    Or live in the IP making it your home, and buy another IP instead of a home.
     
  9. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    This is like talking to the chef about unscrambling an egg - an impossibility!
     
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  10. dabbler

    dabbler Well-Known Member

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  11. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    As an accountant who has seen this error many many times I can tell you its harder to unscramble than eggs. Its like turning scambled eggs back into the chicken. T
    The ATO view is that the loan was repaid when the funds were credited. Deductible purpose has been lost.

    1. Refinance the property with spouse etc ? (Duty exempt state ??)
    2. Sell property (CGT :()
    3. Refinance to use $ to buy a new IP and reborrow $200K more that you have prev planned..
     
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  12. dabbler

    dabbler Well-Known Member

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    Would you guys feel that they would take a militant stance if it was done as a mistake, i.e your other half accidentally clicked the wrong account when doing a transfer ?

    He could also use that loan to pay all expenses from now on and save the cash income and payments and offset that on non deductible.

    OP spend a lot of your free time reading all the great info in this section of the forum, you will probably come up with a plan that suits you.
     
  13. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Yes. There is a Private Binding Ruling in which this exact situation happened and the question was asked with the ATO answering the interest was not deductible.

    I think I have referenced this PBR in one of my tax tips.
     
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  14. sanj

    sanj Well-Known Member

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    you're right, it is worth speaking to someone to get confirmation that there is no way to undo the above and most importantly, to understand why so that in the future the op has a better understanding of dos and donts.

    that is not going to change the result of the current situation though, there is no silver bullet or magic solution and speaking to the ATO will not change that
     
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  15. dabbler

    dabbler Well-Known Member

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    Well there you go.

    In many ways this does not make any sense, it makes sense to limit the ability to increase the loan past the initial outlay, but to accidentally do this then say not claim interest for that month, or even if you paid down for a year, then re draw the money, if this was allowed in many circumstances it would simply be increasing govt revenue assuming income from the IP still comes in. There is probably reasoning I am not thinking of.
     
  16. sanj

    sanj Well-Known Member

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    The reasoning is that deductibility of interest is based on its use, not on its source.

    in this case, the interest 200k used to pay for the PPOR cannot be claimed because it is not for an investment.

    it really is as simple as that.

    what transpired before is irrelevant. what the money is used for now, in this case PPOR, is.
     
  17. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Once you have paid for someone you cannot buy it again. Interest on borrowings will only be deductible if the borrowings relate to investment expenditure - such as borrowing to acquire an income producing asset. If you had paid off this loan and then decided to reborrow that money you cannot associate it with the original purchase because that was already acquired and you cannot associate it with the original loan as that has already been paid off.

    its new borrowings and the use will determine whether the interest is deductible now on. This will depend on where the funds are used and what for.

    Perfectly logical.
     
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  18. sanj

    sanj Well-Known Member

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    unfortunately all that can be done is to learn from this costly mistake. In the future if unsure it's best to seek advice prior to taking any action that may have a significant effect, even if you aren't sure that that effect will be.

    $200-400 sitting down with someone before would have meant $10k worth of deductible interest per year at 5%. if you stay at PPOR for 10 years and assuming nothing else changes it means you will be out of pocket $38k, if you're on a 38% tax bracket.

    I say the above not to rub it in in any way, just use the sting as a valuable lesson.
     
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  19. dabbler

    dabbler Well-Known Member

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    So I do not get some of our other members trying to teach grandpa how to suck eggs - I do understand how we must play within today's rules.

    Forgive me, It is not that logical to me, while I understand all this and how it works as applied, the difference is a technicality really (and a minor one it seems), the loan size is the same, the account still exists, interest payable just took a holiday.

    We (as in many of us here) use an offset account to do the same thing, but, technically, often they are just a redraw anyway, but this is allowed, simply because the electronic number does not change or other, but likewise, his loan amount would not change to take the cash back out.

    Ignoring how it is and that he has gone and used the cash now on a home, fundamentally there should be nothing wrong with this, unless there is some abuse angle I am missing, this is what I am talking about, there must be another reason apart from just how a certain account type operates and the technicality, otherwise, the thinking is outdated, I know that won't change anything, also, it seems to be no good reason to deny if it was an accident, surely if bank staff did it they cannot say the same, but maybe they just would, while allowing all sorts of other questionable things.

    I guess if I was savvy with all tax info, I would have looked it up and read the full history, got some other things to do though, I guess will just have to say it is what it is.
     
  20. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Allow me to use my urine analogy.

    You have a glass of water. You urinate in 20ml by mistake. So you say to yourself I will just take out the 20ml of urine and put it in a separate offset glass - it was a mistake after all and I will be in the same end position. That is logical. You go and ask your doctor and mum. They say once its in its in.

    But you still disagree. You go home and get out your 20ml measuring device and do it. You have reversed the problem.

    The question is - would you drink the water?
     
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