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

Sigh. Not in my case with my lender - no split without reval.

 

Who is it with?

 

Credit Union Australia CUA

 

Hello guys,
Thanks Terry for the write ups

I made this mistake

The place is still PPOR and thinking about turning into IP soon

What about subdividing PPOR, could that be a way out?
or worse as your base cost would be lower?

What about redrawing the money then refinancing with another bank?

Thanks guys

 

What do you mean about subdivision - how could this increase deductibility of interest?
Cost base is a CGT concept and not relevant for claiming interest

If you redraw money deductibility will depend on the use of the money. Refinancing doesn't change this.

 

What do you mean about subdivision - how could this increase deductibility of interest?
- rearrange loans, splitting between the cost between two blocks - does that help in undoing the mistake of repayment/redraw

Thanks

 

Terry, I spoke to an accountant and he said as long as you transferred and redrawed the money before tuning the PPOR into investment it will be ok.

Is that right?

Cheers

 

100% wrong. That accountant doesn't understand basic tax law.

 

Alright, thanks Terry have a good one

 

Hang on - I just noticed this thread is about using redraw.

Is your accountant saying you can use redraw and increase the loan on the house and then move out, rent the house, and claim all the interest on the loan?

If so that is wrong. Only the interest on the part of the loan that relates to the improvement or purchase of that property will be deductible (once that property is available for rent).

 

Time to get a better tax adviser

 

ok, i am still confused

Let me do an example: say my loan is $500,000 for PPOR

I then added/transferred $100,000 of my own money from my saving account to that loan. Still PPOR

Now the loan amount is down to $400,000 with $100,000 redraw available. Still PPOR

1 week later I withdraw/redraw $100,000 I added from my savings account back to my savings account. Loan now back to $500,000. House still PPOR

3 months later if I decide to turn this PPOR into IP, can I claim the full interest on the $500,000?

Many thanks

 

Q1 : Was the original loan to buy the property $500K ?

2. Deductible loan is now $400K
3. After redraw deductible loan is still $400K. The $100K is non-deductible as it wasnt used to acquire the property in question. The loan is also blended. At that point 20% of the loan is non-deductible. Five years later if the loan is $488K then 20% remains non-deductible NOT the original $400K

If you dont follow that methodology you can expect amended notices and penalties and interest. Its a form of evasion to do things recklessly or without regard to law.

No cannot claim 100%. If anyone told you you could they are wrong. If they are a tax adviser they are also stupid. If you can later prove bad advice lead to your penalties etc perhaps sue them. Hard sometimes to prove.

 

Hello Paul,

Q1: Yes original loan of $500K is to buy the house, (original mortgage)

Thats why I am confused. this is done while its PPOR

So once you add money to a loan = decreased it = new loan?

So even if you add your money, once you take it you wont be able to claim full deduction on interest?

Cheers

 

No.

 

Taking money from a loan = borrowing
So unless you used that $100k to improve the property that portion of the loan doesn't relate to the property. It will relate to what it was used for.

 

Terry and Paul thanks for clearing this up.

cheers

 

I made a slight error a few days ago, which I fixed within 10 minutes of transfer. Withdrew from the wrong account..

Redraw instead of offset. To fix, I deposited from the offset, back into the redraw.

Am I in lifetime x-loan trouble? Error was only $5k, which in the comment part in one of the transfers, i quoted as wrong account used.

PPOR, with redraw of $11k.

 

Let me ask you a question. If you deposited 5ml of urine into your cup of tea by mistake and took it out again would you drink it?
If i said, but it was only in there for 5min, would that change anything?

 

Moral to the story is dont allow Terry to make you a cup of tea