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

Thanks Terry. A lot of people confuse redraw with offset. I've mentioned getting an offset to people and they say "I've got redraw, the bank said it's the same" GRRR!!

 

Yes this sure is a problem.

 

Hello again,

If I used most of the $100K to subdivide, e.g. pay for sewer, water etc would it still be deductible?

Thanks

 

It might be

 

Depends on the progress of new laws before Parliament too. They apply to costs after 1 July 2019 and seek to prevent deductions being claimed for "holding costs" such as interest, rates etc until the development has completed.

 

with some exceptions for businesses and some type of entities.

 

already paid them last financial year, i will just leave that house as PPOR

but when I split the loan into 2 i.e. subdivision, wouldnt that loan be already a mixed loan?

 

my situation is in personal name

 

Not if it previously deductible.

 

Hey guys, have a hypothetical scenario which I'm trying to figure out in my head:

Buy a PPOR, using a 1 million loan (split 800k and 200k) interest only as it will become an IP in the future. Have 200k cash in offset. Pay 200k from offset into the 200k split, redraw, and invest in shares. So far so good, interest on 200k shares is deductible. However, this means only 800k of the initial loan for the PPOR will be deductible when it becomes an IP.

A year later, buy another ppor with a new 1 mill loan so the first house becomes an IP. So still 1 mill deductible debt, 1 mill non deductible debt for a total of 2 million. However, only 800k of the initial loan is deductible for the ip, because the other 200k was redrawn and used for a shares.

In this scenario, is there any way to recycle so that we end up with 1.2 mill deductible debt (1m for the ip and 200k for the shares), and 800k non deductible debt on the new ppor? Is there anything that should have been done differently at the start to avoid this?

 

Yes, borrow from a related party perhaps.

 

But no way to turn the initial structure into a 1.2 mill deductible debt for the IP and shares?

 

If you borrow 100% to buy the property and 100% to invest in income producing shares the interest will be deductible - generally

 

So, we have a loan secured by PPOR with 100% in offset.
We want to use those funds (most if not all of) to buy an IP.
Do we use those offset funds to pay off the loan in full then redraw? Do we need a split if using the whole loan amount?
Also, the intention would be to eventually move into this IP after selling PPOR.

Must add that there is still 2yrs IO remaining.

 

If you use the funds directly the interest won't be deductible because the loan relates to the owner occ property.

You would need to debt recycle by splitting the loan, paying it down and reborrowing to invest. Splitting only needed if the loan will have 2 uses.

See
Tax Tip 9: Don’t use Cash in Offset account to Invest Tax Tip 9: Don’t use Cash in Offset account to Invest

Tax Tip 88: Use cash in offset to invest or pay down loan and reborrow? Tax Tip 88: Use cash in offset to invest or pay down loan and reborrow?

 

Do you have enough equity in the PPOR to take out another loan to be used as the IP’s 20% deposit and buying expenses and take a 80% loan secured against the IP?

Will you have sufficient income to cover the two new loans?

Just trying to maximise tax deductiblity.

 

Yeah, nah.
Reachd our borrowing limit.

 

Numbers for numbers sake, not real.

Loan $284,000 . Offset $284,000
Use offset to paydown loan to say $280,000
Split loan 1 $4,000 (PPOR) keeping offset account here
Split loan 2 $280,000 (new IP) no offset
Redraw the $280,000 against split 2

I understand (could be wrong) banks could finalise the loan if paid off in full therefore be unable to redraw?

 

why split? $4k prob too small for a split with most lenders.

 

If paid off in full bank might close loan?