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Tax strategy - Which offset account to keep money in and for how long

Discussion in 'Accounting & Tax' started by mpty, 9th Oct, 2016.

  1. mpty

    mpty Member

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    Hi,

    We have lived in our existing PPOR for 7 years and worked hard to pay down the mortgage and save money. Over time the value of the property had risen and in 2015 we decided to upgrade to a bigger house. Below are some important events to consider. Please help me with my questions, point out any mistakes I have made and help me in the right direction to fix them...

    1. Aug 2015 - Existing PPOR loan balance 260K, market value 630K and 140K savings in offset A/C.
    2. Oct 2015 - Purchased a vacant land for 585K and borrowed 468K (80% LVR). To pay for the land we released equity of 100K which increased PPOR loan balance to 360K and paid for the stamp duty and difference from our savings.
    3. Oct 2016 - Borrowing 505K for construction as investment loan and refinancing existing PPOR as investment interest only loan. According to broker the loans needs to be investment loans for better borrowing capacity and interest only option. However, we may choose to use newly constructed house as PPOR.

    Now my questions are as follows:

    1. Should I park my savings in existing PPOR loan offset account or construction loan offset account during the construction stage?

    2. If I change my existing PPOR to Investment after construction completion, on which loan balance can I claim interest? Will it be on 260K or 360K or whatever the new balance is after construction?

    3. From a taxation viewpoint, is it even wise to convert this PPOR to Investment considering the claimable interest will be less than the rent I receive (approx $1900 per month)? Will I be better of selling this property and avoid CGT?
     
  2. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Many mistakes made. Mixed purpose loan for existing. Get some tax advice and split it into relevant portions asap.

    1. Put your money in the offset attached to highest interest rate. Notjing deductible yet.

    2. Could be 260k but maybe much less.

    3. Thats not a tax question but an investment question with tax aspects. You have to crunch the numbers and look at buy and sell costs.
     
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  3. mpty

    mpty Member

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    Thanks Terry. Both accounts being investment loans will have the same interest rate. Construction loan will have a higher balance.
     
  4. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    It sounded to me that were were currently living in the ppor and the loan attached to it partially related to its purchase. And that you were going to move into the place you are constructing.
     
  5. mpty

    mpty Member

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    Yes currently living in the PPOR and released equity to buy vacant land and now refinancing again to move the loan to new lender who will also extend loan for the construction. The land loan is already with the lender of construction loan.

    I guess all 3 loan accounts will be separate so how will my PPOR loan become mixed purpose?
     
  6. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    They dont seem like investment loans to me. I would keep cash in the offset against the main residence loan.

    If you increased the main residence loan it will be mixed purpose.
     
  7. Rob G

    Rob G Well-Known Member

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    Unfortunate use of the term 'investment loan'.

    When the existing main residence becomes a rental property, the $260k loan balance will be the amount for calculating deductible interest expense (assuming no redraws for privare purposes - need to scrutinise records).

    This will be the 'investment loan'.
     
  8. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    Rob raises a valid point that is often confused. The loan itself doesnt give rise to deductibility. The USE of the proceeds do...So you can use IP equity to buy a boat and its non-deductible or use home equity to buy shares and that is deductible in some cases. As Rob said....Need to scrutinise history of loan for redraw with a different purpose. So what one person may call a PPOR loan is an investment loan when the former home is then used as an IP.

    Even Westpac got caught by this confusion around 2 years ago. APRA was critical as they didnt know if loans were owner occupier or investment. They had to ask loads of customers if their loan property was being used as owner occupied or investment. Some unhappy borrowers then got slugged a surcharge for investment use.
     
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  9. mpty

    mpty Member

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    Thanks Terry, Rob and Paul.

    During the 8 yr history of the loan. The only redraw was an amount of 30K done a few days before refinancing the PPOR loan 1 year ago to release the 100k equity. This 30k redraw balance was the result of interest rates coming down over the years.

    This happened a year ago. If I convert this to IP, does this mean I can only claim interest on 230k as opposed to 260k?
     
  10. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Nope.

    It was a mixed purpose loan from the time you redrew the $30k (assuming you didn't use it for this property).

    So you will have to work out the portions of the loan. This will be messy if the loan was PI.