Tax Tip 19: Avoid Using Redraw on an Owner Occupied Loan

Hi Terry,
Thank you for your reply!

Yes, it's a $22K loan and the balance is close to $0 (it's paid off but I'm leaving it open hoping to redraw the money if I need to, hence it has $180K to redraw )...I read your tax tips, guess I cannot do what I want to do, but I thought I better run it by you just to double check:

my plan is to redraw money from this PPOR to buy a new PPOR, then of course I want to transfer all the extra repayments (being $180K here) to my new PPOR to reduce the non-deductible interest, then leaving my current PPOR as an IP (the loan will be owing $180K again), I thought I could get the interest (calculated on $180K) deducted for tax purpose, but I guess I cannot now from reading your tips...ATO won't be happy to see the interest deducted is used for new PPOR....

Having said all this and I kind of understand the logic you explained in your tips, but I'm just curious and still a bit of confused, technically this $180K is my money (extra repayment I've made), if I were to take it out now and put it in a saving account, then later on I start to rent out this property, so at the time when the property is rented out, its loan becomes an investment loan, and it still owes $180K, will interest on this be deductible? All I'm doing is to put the loan on its original track (paying it by 30yrs rather than quicker), Won't ATO consider the loan amount at the time when the property becomes an IP, or will it always check the history of this loan (found that it was once nearly paid off, hence no interest is claimable??)

Sorry for being a pain here, and thanks again for your time and patience!

 

This is a common argument - but doesn't work.

Interest is only deductible on money borrowed for investment or business use. Taking money out of a loan means you are borrowing. So the use of those funds will determine the deductibility.

If you had put those funds into an offset account instead you would have been right. No effect on borrowings when you take the funds out.

Not having an offset account has cost you approx $180,000 x 5% = $9,000 per year in lost tax deductions. That may equate to around $4,000 cash in your pocket per year, for the life of the loan.

(not trying to rub it in!, but for others to learn from your mistake).

 

Thank you for your quick reply, Terry!

Yep, I've calculated that loss for sure...hope others can learn...

Guess I better just sell it to buy a new home then.....instead of letting ATO take it....LOL..

 

Another option is a spousal sale. Depending where it is and how it is owned you may be able to do a transfer for 50% or 100% with no duty and the transferee could borrow to buy.

 

I'll certainly follow this tip when I'm married one day...
Thank you for your advice, Terry!

 

The benefits of getting married are many!

 

Hi Terry,

It may sound like a very dumb question but I'm going to ask anyways as I am totally confused and no point sitting here guessing. I'm a newbie to property investing and from reading your tax tips i think I've made some (if not lots) of mistakes.
This is one of them. We have a loan on PPOR which has balance of 330. We have an offset account which had 55k on it but I though it would be the same whether i leave it there or transfer it to the loan and use redrawn if need be. so I transferred 30k to the loan couple of months ago. We plan to rent this house out in a year or so and move interstate. And about to refinance. From reading your tax tips, I could see why we shouldn't do what we did. But Is this too late to fix it? And is there a way? Can I transfer that 30k back to the offset? Or that'd creat more damage?

Many thanks.

 

Yes, unfortunately you have paid down debt relating to the purchase of the home. If you take the money out now you would be borrowing, with the purpose of investing in the offset account. So you would make things worse by redrawing and putting it back in the offset. You would end up with a mixed loan.

Perhaps some of the other strategies could assist you - spousal transfer, borrowing to pay expenses etc.

Glad to see that you realised your mistake now, as most don't.

 

If you want to access that $30k for your new PPOR, when you refinance you should be able to get a new loan split created that will allow you to access those funds for the purchase.

For eg, after refinance you'd have 2 loans -
Loan 1 - $300k which is the current balance of the loan after the $30k was paid into it
Loan 2 - $30k which is undrawn, to be used as deposit for the new house.

Total lending $330k.

That $30k split won't be deductible as it will be used for your new PPOR, but splitting the loan will allow you to maintain deductions on the $300k portion when it becomes an IP.

 

Thanks Jess. So much to learn and absorb. Glad that I've came across this forum .

 

I just noted Terry's earlier reply. Let me add a bit extra to his reply. I know Terry is aware of this issue but his simple reply may lead to confusion.

If you redraw the $50K the NEW $50K loan would be deductible but you would end up with a blended loan. Blended loans pose a problem as you cant just assume that $50K of the balance is one purpose and the balance for the original home. It can be a complex mathematical issue. Terry has posted a tip on blended loans and why these should be avoided.

Ideally each loan purpose should be a separate loan. This can lead to several accounts BUT it doesn't taint the other loans and makes it very simple to identify the deductible amounts each year.

 

How does this become complicated?
A redraw was made for an investment purpose. The interest paid on this redraw is deductible. The interest on the rest of the amount of the PPOR is non deductible. In case later on the PPOR turns into an IP, the loan amount minus the redrawn amount is tax deductible.
However, an individuals tax liability at the end of a financial year would include the costs incurred on the PPoR turning into an IP as well as the redrawn funds used to purchase an IP.

 

Every deposit you make into a mixed loan like that would come off the non-deductible portion as well as the deductible portion.
You are throwing money away by paying more tax if you don't split your loans. If it was IO you could just keep apportioning though,

 

When you sell perhaps.

 

Hi Paul or terry,
What about we refinance the whole property current ppor with the bank and put the excess money in offset and use the money to buy new ppor before making the current one IP , so can we claim interest on the revalued value of the Propety ?which will be the Futher IP.

 

If you can get this hack to pass muster, you will have a lot of happy campers on PC.

 

Robi - no. You can only claim interest deductible for purpose of borrowings. The additional borrowings are for your new PPOR deposit.

Ie say your current PPOR initial value 400k, loan 320k. Revalue to 500k, loan increased to 400k with additional 80k as you mention above.

To use 80k for your new PPOR deposit, best to split the loan, loan 1 - 320k for current PPOR to become IP (deductible when IP). loan 2- 80k as revalued funds to be used for deposit for new PPOR (new borrowings - not deductible as PPOR).
Also keep in mind if new PPOR could ever become a IP in the future.
You want to ensure loans & funds are not mixed / contaminated.

Terry has tax tips on debt recycling & dangers of how you use funds in offsets. Look at these carefully & chat with your broker & accountant.

 

nope

 

In falling markets splitting isn't an option if the bank does a reval of the property. It is, but you end up paying a higher LMI which would negate any (tax deductible) related savings - I dont know what happens in extreme cases like if a property worth 500k is now at 100k. This is the pickle I am in right now.
Can you please explain apportioning ? How do you mean ?

 

Splitting is an option with many banks - no reassessement needed.

Read my tax tips for apportioning:
Tax Tip 3: Mixing Loans - Don’t do it https://propertychat.com.au/community/threads/tax-tip-3-mixing-loans-dont-do-it.1517/

Tax Tip 45: How to work out the Portions of a Mixed Loan https://propertychat.com.au/communi...o-work-out-the-portions-of-a-mixed-loan.4410/