Tax Tip 13: Simple Loan Structuring Strategy

And when not fully paid down it can leave it blended...but is that a concern?

eg $70,000 facility. You repay $69,999. This leaves $1 on loan. Then redraw $69,999

So it is blended. BUT....1/70,000th is non-deductible perhaps.. This is 0.001428571% a concern...For $10,000 of interest 1.42857 cents will be non-deducible and 99.999857% is deductible. So its not a concern when rounding occurs. But for a $2m loan at 5% the deduction problem is $1.42 of overclaimed interest. Not really material.

 

Thanks all for the tips from this post & others; my first IP is going great. I am in process of structuring IP2 and just have a question on an existing loan?

PPOR loan @ 350k with offset 60k. I am splitting $350k by A: $290k & B: $60k, paying offset funds into loan B & redrawing to use as 60% deposit for IP2.

I have existing loan C: (from PPOR equity) $165k which was FULLY paid down & $125k redrawn for IP1 leaving $40k sat in the loan.
I need to use the $40k to make up the deposit deficit for IP2 ($100k).

Question A) Do I need to split loan C or just divvy up the interest (76/24) at tax time?
Question B) Is it still preferential to split so completely separate loans per IP?
Cheers as always.

 

get some specific tax advice, but
a) you could apporiton the interest
b) see my post on the exception to when splitting is needed.

 

Thanks Terry, I'll go for a split to reduce the likelihood of any issues down the line for refinance and/or sale of IP; Tax tip 55 & Legal tip 15

 

Follow on question;
In order to split the loan, I was required to remove the excess $40k into a newly created offset account, the loan has now been split into two components.
Question is do I need to repay the new split, then redraw for settlement (as new borrowing?) OR can I send the funds straight from the new offset for settlement?

Thanks a bunch guys

 

That is something you need tax advice on.

 

If you offset a loan rather than pay it down it gives you move options. If you have equity you could borrow, but if you don't then you have a choice of either using the cash or debt recycling. Each one might be suitable for different situations.

 

Hi terry,

When paying down to 0 doesn't it Closes the account automatically. If not then, what is the process of making it new investment loan from bank prospective? Will it be simmilar to equity release or top up? Does the bank have to do valuation and reassess the loan factoring all the income and expenses?

 

Also, if it was borrowed for home loan then later reborrowing to invest in share will not make it mixed purpose or it will reset it purpose?

 

This will depend on the lender and the product. In most cases it will close the loan out.
If that happens a new loan application might be needed.

Solution is to leave a small amount outstanding.

It will be a mixed loan but in such a small portion it won't matter.

 

As long as you pay the loan down to zero when you redraw it the use of the loan will be dependant on what you use it for. For tax reasons this is what determines deductibility, not the original use or purpose

 

Hi @Terry_w ,


I have been using this structure for 8-9 years now. It has worked great for me. I am at a stage where i have few splits fully borrowed by debt recycling. Question I have now is:


Can i borrow from a fully paid off new Split (which has better interest rate) to pay off another (tax deductable). Will the new Split be tax deductable?

 

Raj, that would just be a refinance. Paying out one loan with another doesn't change the deductibility of interest - if done right.

I have written a tip on this - I think.

 

Perfect! Thanks @Terry_w . I will search for the tip now.

 

Hi, I own one PPOR valued at 1.3mil with
$620,000 O/O portion
380,000 investment split
I have used some of that split to purchase a Commerical property under a trust for $580,000
The trust has a debt of $377,000 against it. Call this trust 1

my question is, if I was to refinance my loans or purchase another property in either 1. My personal name or 2 another trust, does the loan under trust 1 count towards the debt for a DTI and/or servicing assessment?

thanks,

 

Have you onlent the borrowed money to the trustee?

the trust cannot claim the interest on your loan

 

Terry I have a loan secured by my PPOR where I used that as a deposit for an investment.

For that investment I opened a trust and have a loan under entity.

I just want to know if that loan under the trust entity affects me personally in my personal name when purchasing.

 

Yes

1. Was there a onlending agreement to the trustee of the trust ? If not it may be non-deductible to the trust and also personally. The trust must have a legal obligation to pay interest througha documneted agreemnet. Skipping that step can be a problem.
2. As you have borrowed for lender and onlent you may need to report interest income (from trust) and a offsetting deduction for the interest paid to lender. The two may equalise ? The trust will have the ultimate deduction if its all correct

 

Hi Terry,

I've had a similar structure set up for a couple of years for our PPOR (valued at $750k most recently by bank at refinancing), after doing some changes I now currently I now have:

Split 1: $100k outstanding ($0 redraw)
Split 2: $100k fully paid off
Split 3: $300k fully debt recycled into ETFs

Property is owned 50/50 with spouse, if we were to move out into a new PPOR and turn our current place into an IP, what options do we have to make as much of the tax-deductible debt is on the IP?

I know this could've been alleviated with some more forward planning, but some circumstances have meant we can't stay where we are anymore.