Tax Tip 13: Simple Loan Structuring Strategy

Discussion in 'Accounting & Tax' started by Terry_w, 8th Aug, 2015.

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  1. Silverghost

    Silverghost Well-Known Member

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    I have just refinanced my PPOR home loan with a new lender to release equity for the purchase costs for an investment property. I asked them to set up two splits - one of $260k loan for the PPOR (on an OO rate), and one of $100K for purchase costs for investment purposes (on an INV rate), to avoid mixed loans. The home loan products (with Macquarie) come with one offset account per loan.

    The refinance settled on Friday and the new lender has advanced the $100k for investment purposes, but they paid it into the offset linked to the OO loan split (ie it is currently offsetting my $260k OO debt). I have not made any transactions on any of the accounts as yet.

    If I transfer these funds into the INV loan split (ie to pay down the $100k, or at least nearly pay it down to avoid completely paying off the loan), and then redraw the funds for investment purposes when required, does this keep my investment loan clean and unmixed? Or has the lender advancing the funds into the offset for my OO loan split in effect contaminated the investment loan split?

    Any thoughts greatly appreciated.
     
  2. Terry_w

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

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    Are you a client of mine? The exact same thing happened to one of our clients last week with Macquarie.

    Pay off the loan and reborrow and no harm done.
     
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  3. Silverghost

    Silverghost Well-Known Member

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    Terry, no not a client just an appreciative reader of your posts :).

    Thanks for your comments I will transfer the investment funds into the investment loan to pay it down. Just to be clear, I assume when you say reborrow you mean draw down on the existing investment loan split for the IP purchase costs (as the effect for tax purposes is to create a new a new loan?), rather than pay off the $100k INV loan split entirely and set up a new split. However if I've misinterpreted your comments, please let me know.
     
  4. Terry_w

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

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    Yes pay off the one that relates to the mixed offset and then reborrow it when investing
     
  5. Username86

    Username86 Well-Known Member

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    Curious, shouldn't both splits be at OO Rate as they are secured by PPOR?
     
  6. Terry_w

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

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    With most banks it doesn't matter what the security is used but how the funds will be used. If secured by the main residence and investing you would generally get investment rates.

    However if you debt recycle, as per this strategy, you would get OO rates as this is what the loan starts off as.
     
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  7. DylanC

    DylanC New Member

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    Long time lurker, first time poster. Thank you to everyone for all of the great information and discussion, and a special shout out to terry_w for his prolific content!

    My situation is that I have recently purchased a PPOR with settlement just under 2 months away. I have sufficient cash to buy the property without needing a loan, but this will leave me with little cash available for quite a while! I am concerned that if there is a stock market correction/crash that I may not have sufficient funds to available to invest if the time comes. I am therefore looking into getting an OO loan with the intention of having it fully paid/offset and then redraw to invest if the opportunity arises. Of course I also want any interest incurred on the funds used for investment to be tax deductible. I have a question about the mechanics of how this works.

    Terry, as I understand from some of your other posts you recommend setting up the loan splits upfront - in my situation would a sensible setup be for example:
    Split A - 100k (not used for investment), has offset attached for access to cash required for living expenses etc
    Split B - 100k (for investment), fully paid, until redrawn for investment

    Is there any particular benefit to having multiple splits for investing (eg: into 25k splits rather than a single 100k split)?
    Is is correct that it doesn't matter that the investment split might sit there for 6 months fully paid before the redraw to invest? (with regards to interest tax destructibility)
    I'm not sure about how offset accounts interact with the different loan splits or does this even matter?

    I am thinking of using Suncorp as they are offering no fee for life of loan (incl loan splits, redraw/offset) and 2k cash bonus for FHB - does anyone have any feedback about using them?

    Many thanks for your input.
     
  8. Terry_w

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

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    Sounds like you need to see a tax advisor and a credit advisor.
    I am not able to say if it is sensible to split the loan like that based on the info provided
    For deductibility of interest you need to borrow to acquire income producing assets. When you pay a loan down is not really important.

    splitting can be a good idea because
    a) there might be different entities using the money
    b) administratively easier to apportion interest and repay a loan when the asset sold.
    But, it might not be strictly needed:

    Tax Tip 55: An Exception to the rule about splitting before Repaying a Mixed Loan Tax Tip 55: An Exception to the rule about splitting before Repaying a Mixed Loan
     
  9. Silverghost

    Silverghost Well-Known Member

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    So now the latest issue with my split loan structure is the repayments.
    Just to recap my loan structure is as follows:
    • OO loan split
    • INV loan split for investment purposes
    • offset linked to OO split (where savings are parked and salary is paid into)
    • offset linked to INV split.
    The INV loan funds were advanced at settlement and then I paid then back into the INV loan split, with $0 balance in offset linked to INV split. I have not used any of the funds yet in the INV loan split (still looking for investment property).
    The INV loan split is P&I and the repayments were set up to come out of the offset linked to the OO split. What has happened now is that the repayments have "bounced back" into the offset linked to the INV split. I am concerned about the risk of contamination/co mingling of borrowed and non-borrowed funds in the offset linked to the INV split, though there was (and remains) $0 borrowed funds in that account. The only funds in there are the (non-borrowed) P&I repayments.

    I spoke directly to my lender (Macquarie) and they said the repayments have bounced back because the INV loan split has not been drawn down and the loan account cannot go into credit. They advised that the P&I repayments would normally be set up at this point (ie before INV funds are drawn down) to be redrawn from the INV loan itself.

    I then spoke to my broker, who advised that a loan account cannot be used to pay down itself and that the repayments would need to come from a different account. They proposed that the repayments instead be made from the offset linked to the INV split. The problem I see here, though, is the risk of co-mingling borrowed and non-borrowed funds. I would have to transfer non-borrowed funds from my OO linked offset into that account to pay the INV loan split. Unless this was done very carefully, I can see things becoming potentially messy when the time comes to use the borrowed funds in the INV loan.

    My questions are:
    • can I transfer the INV loan split repayments that have already "bounced back" into the INV linked offset into the OO offset to restore my loan structure, or has contamination already occurred in some way?
    • how should P&I repayments on an INV loan split be set up before the funds in the INV loan split are drawn down, given the conflicting information from my lender and broker?
    Any thoughts much appreciated.
     
  10. Terry_w

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

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    best to seek specific tax advice.
     
  11. Silverghost

    Silverghost Well-Known Member

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    Fair enough, I can see the value in getting some tax advice on the first issue.

    On the second issue, will a tax agent know how PI repayments on an INV loan split would normally be set up? I guess I had assumed this was more the domain of brokers. Surely this type of loan structure is not uncommon? Or is the issue more that the repayments can be set up different ways, with different tax implications?
     
  12. Terry_w

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

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    I don't know, but your question seems to be about the tax aspects.
     
  13. MangoMadness

    MangoMadness Well-Known Member

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    Terry, thank you for sharing your wealth of information.

    In the case of a home loan in 2 peoples names and using a split to invest in a single persons name does the interest deduction follow the investment or does it need to be split between the people on the home loan?

    EG. Pat and Paul have a split home loan
    200k P&I
    100k I only

    Paul puts 100k into the 100k loan, withdraws it and buys 100k of shares in his name
    Does he get to use the full interest deduction against the shares, or does Pat being on the home loan complicate the deduction?

    Thanks for your time and your contributions!
     
  14. Paul@PAS

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

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    The investor who owns the investments and who uses the borrowed $$to buy them will be allowed the interest deduction provided they are one of the bank borrowers (assuming they are spouses).
     
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  15. MangoMadness

    MangoMadness Well-Known Member

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    Awesome, a very concise and informative reply.

    Thanks!
     
  16. Terry_w

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

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    There is a separate tax tip on that
     
  17. MangoMadness

    MangoMadness Well-Known Member

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    Just a follow up re:split loan

    I have been informed putting the full amount into the split loan will close it as it is considered a separate loan. Is there an accepted minimum amount between the loan amount and the money to be redrawn that the ATO is happy to accept as insignificant in relation to claiming the interest?

    EG $50k Split, If I deposited $49,990 and then redrew it for investment purposes is that $10 considered an insignificant amount that the ATO wont worry about.
     
  18. Terry_w

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

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    It would need apportioning. Work out the % and see how significant it would be
     
  19. MangoMadness

    MangoMadness Well-Known Member

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    What is significant for me might not be what is significant for the ATO :)

    43c/year on $10, I could buy half a bag of cobbers and freckles with that (if it was still 1988) lol.

    Jesting aside, is that the SOP? Put in all bar $1 or $10? All the guides I have read simply say 1) split loan 2) put offset cash into split and then take it out again to invest. They dont seem to mention 'dont put the whole amount in or it will close the loan' or advise on a suggested buffer.

    Overall I just dont want to mess it up. I would rather ask and possibly look foolish but get it right the 1st time.
     
  20. Terry_w

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

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    it basically doesn't matter if it is 'significant' or not. You will need to work out the percentage and apportion it.

    Interested to know what guides you have read.
     
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