Tax Tip 14: Never ‘Park’ money in a loan

Never ‘Park’ money in a loan


I sometimes see clients who had come into some money, perhaps from the sale of the main residence, and then temporarily deposit that money into an investment loan.


Their excuses mainly being:

1. The loan didn’t have an offset account, and/or
   
   
2. I wanted to save interest.
   

They will then later redraw this money and use it to purchase the owner occupied main residence. They think they can claim all the interest on the investment loan.


Well, they have made a serious and costly mistake in doing what they did. Their attempt to save a few dollars in fees and interest has cost them many thousands of dollars in lost tax deductions.


The two most important concepts here are:

Any deposit into a loan is considered a repayment. it is a permanent repayment of the loan.


Any withdrawal from a loan is a new loan because it is new borrowings..


Example

Borat has an investment loan of $600,000 and cash $200,000. He has cash from the sale of his main residence and he will be settling on the new main residence within 2 months. Naturally he wants to save interest so he parks the money in the loan reducing the balance to $400,000.


Borat later takes the $200,000 out and uses it on his new main residence. but doing this he has really paid down investment debt and borrowed to buy a private asset creating a non deductible loan. In the process he has cost himself a fortune - approx $10,000 per year in deductions for as long as he owns the investment property.


The loss of tax deductions is not Borat’s only problem as he has created a mixed purpose loan too.


Tip - Never pay any money into an investment loan. Use an offset account attached. if your loan product doesn’t allow for an offset account then either change products or use a savings account.

 

Is it the same with a line of credit from your PPOR. Let say I buy a PPOR in cash, than go to a bank and apply for LOC. Get a LOC of about 60% valuation of my PPOR. Than I use that LOC to buy an IP or trade CFD's using that loan and if I pay it back I can't use it for deductions another time to buy a second IP?
Sorry for a newbie question, but I'm trying to learn how to borrow and what advantages it might give me.

 

LOCs are just loans. Any deposit into a loan is a repayment and any withdrawal is new borrowings.

All the usual rules apply.

 

Is there anywhere I can get a book of some sort that will clear my mind about loans and what I can or cannot do with them? To understand what are the usual rules.

 

I am in the process of writing one - 220 pages so far

 

Will most banks set up an offset account for free if you ask them?

 

if I put 10% deposit ($50k) on my PPR OTP purchase ($500k) then value comes up to $600k and I'd like to borrow 20% ($120k); should I put the surplus difference of $30k into offset account?

 

Depends on the product you are on.

 

It would be a good idea to maximise borrowings and park excess cash in the offset as this will result in higher deductions if you rent the property out.

 

And then Borat says to the tax man "You never get this, you never get this, ahlalalaaa la" and then one day the tax man he get this!

 

I can wait - about a year.

 

This is brilliant!

 

Very brave move Terry!
I would be scared that I spend 2 years writing a book and then ASIC/APRA/ATO change the rules and the info becomes no longer relevant.
I imagine there have already been a few edits in the past 3 months.

 

Its mainly about deductibility of interest with a bit of lending issues - which need to be updated.

 

If you have a LOC of 60% from you PPOR and the IP returns dont cover the costs of the IP nor has an growth been achieved so no equity in the IP.

What happens when the LOC runs and the bank wont give you anymore.
Is it best to be keeping the LOC as low as possible as well as money in the OS.
Just trying to learn and get my head around how this should be working also.

 

LOCs generally don't have terms. Assuming the lender doesn't ask for it to be repaid you can keep on paying the interest each month.

Onlly once the main residence debt is paid off would you then want to consider paying down investment debt and even then some people don't but just save the extra money in the offset instead.

 

Have you finished the book?
Where can I find it?

 

Yeah, almost finished. But not going to release it just yet!

 

Dear Terry,

You are the best. Did you finish the book?

 

Lol, not yet! I keep getting side tracked.