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

Discussion in 'Accounting & Tax' started by Terry_w, 9th Aug, 2015.

  1. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    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.
     
    Perthguy, Rithik and poeter like this.
  2. barnes

    barnes Well-Known Member

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    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.
     
  3. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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

    All the usual rules apply.
     
  4. barnes

    barnes Well-Known Member

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    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.
     
  5. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    I am in the process of writing one - 220 pages so far
     
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  6. 2FAST4U

    2FAST4U Well-Known Member

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

    bonanzawealth Well-Known Member

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    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?
     
  8. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Depends on the product you are on.
     
  9. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    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.
     
  10. Ardi

    Ardi Well-Known Member

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    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!
     
    Last edited: 11th Aug, 2015
  11. barnes

    barnes Well-Known Member

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    I can wait - about a year.
     
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  12. amkr

    amkr New Member

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    This is brilliant!
     
  13. albanga

    albanga Well-Known Member

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    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.
     
  14. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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

    fossill Member

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    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.
     
  16. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    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.
     
  17. Peter P

    Peter P Well-Known Member

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    Have you finished the book?
    Where can I find it?
     
  18. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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

    Alisdair New Member

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    Dear Terry,

    You are the best. Did you finish the book?
     
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  20. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Lol, not yet! I keep getting side tracked.
     
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