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

Discussion in 'Accounting & Tax' started by Terry_w, 16th Aug, 2015.

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  1. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Split won't change that. You would need to confirm with the bank if they would close the loan, but even if they said having a $0 balance would be ok, i would still be wary. just pay down the loan to say $100 and redraw. 99.9% will be deductible.
     
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  2. Phar Lap

    Phar Lap Well-Known Member

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    Thats the answer Im looking for!
    Thanks Terry!
     
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  3. dorjeswallow

    dorjeswallow New Member

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    Hi Terry,

    Big fan of yours, have had some serious limitations as to which banks I can use due to being self employed mixed PAYG/ABN...i've been left with the only 1 bank who will lend, which has no offset facility, but will do unlimited splits.

    Its my first place, an apartment PPOR. I would like to renovate, and then have the option to rent it out later (2 years maybe?) and claim costs. I'm assuming anything spent on property renovations I should use from my redraw, as opposed to external savings, so i can claim interest on the loan later when I rent it out?

    Of course I understand not to use the redraw for anything else.

    Also, do you think I should organise some splitting now so I can debt recycle post renovation?

    ie, some small amount interest only (debt recycling), some variable with redraw (renovations), the majority fixed at a low rate...eg 10, 10, 80?

    Or in your opinion should I just pay off the loan, get some more equity, and refinance after 2 years to an bank which will get me an offset?

    I have 20 percent of my place already payed. Just trying to find a way to be smart with the system available to me.


    Cheers,

    Self Employed Big Fan finding Banks hard to deal with...
     
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  4. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    You would only have extra to redraw if you had paid extra off the loan.

    If you are going to move out, why do you want to debt recycle? Will you move back in?
     
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  5. dorjeswallow

    dorjeswallow New Member

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    Hi Terry,

    Yes I would potentially take advantage of the 6 year PPOR rule, and move back in and reset at some stage. It's just an option I wanted at my disposal. I haven't decided if I will move out, but it would be great to have the option, and thus not taint the loan with mixed use.

    I'n relation to the redraw, I'm aware of that, I have some small savings I could use to knock off extra amounts on the loan, then use to begin some small renovations...

    Does my splitting idea check out? The debt recycle would be for shares, as per Peter Thornhill approach. I would try to pay off the interest only portion first (1 dollar remaining), then redraw that way for shares.

    Given my situation, do you feel the splitting is a reasonable way around dealing with things?
     
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  6. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    i can't comment on your specific situation, that is something you need advice on.

    But splitting may not do much harm
     
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  7. PC_USER_456

    PC_USER_456 Member

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    Hi Terry

    I understand well enough the concept that it is the purpose of funds (not the security) that determines the tax deductibility of interest payments.

    For loans on investment properties, I never pay them down with excess funds. I leave the funds in my offset account for anything I like (whether it is something like going on a holiday or alternatively incoming producing like buying shares) and thus the loan purpose remains tied to the investment property and interest deductible.

    I am less clear how to handle my loans on owner occupied properties. Let me provide an example. If I take out a loan for 1M for a PPOR and also have 100k sitting in an offset account, none of this interest is deductible. However, how do I approach the situation from here if I want to spend 100k on shares, and have the interest on that 100k shares be deductible? My understanding is that I need to pay down the loan to 900k, then re-draw the 100k, then use the 100k to buy shares. This ensures a new 100k loan for a new (investment) purpose. It will not suffice to simply buy the shares with the cash position and start deducting interest. Do I have this right?

    And if I do, am I correct that this has a potential drawback in the event that I ever wish to convert the PPOR to an investment property? I believe this would turn the 900k non-deductible loan (purpose PPOR) into a 900k deductible loan (purpose IP) but that I can never get the 100k back from the share purpose (assuming I sell them) into the property purpose.

    One related question:

    What is the way to best explicitly illustrate that a 100k share purchase such as the one above was financed with a loan rather than a cash position?

    One unrelated question:

    How do people handle refinances on deductible P&I loans? If you take out a 1M loan and some time later the balance is ~900k and you are refinancing it (but the exact balance is not known because the refinance date is 1-3 months in the future and the bank is unhelpful in giving you an explicit figure that far out), what do you request the new balance to be? Is it appropriate to just tell the new bank that the figure you want to re-finance to is 900k? Is the ATO going to care that the old balance was 901k at time of discharge (almost certainly no) or 899k (in theory yes, but in practice...)?

    Regards
    456
     
  8. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    The $100K would be best as a new split immediately prior to the new draw down to avoid the blended issue with the $1m. The existing loan should have its own account for the eaxct $$$ value immediately prior as well. Each USE should have its own loan.
     
  9. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Yes, but it is not complete. You would need to split first or have a mixed loan. The borrowed money should avoid detours too.

    Yes, but if you invested in shares with the cash you could always sell them if you move back into the property and use that money to pay down the loan - and then potentially buy more shares.

    Being able to trace the purchase monies back to the loan.

    Best to err on the side of having extra money left over - but not too much. You could then use this money to pay for property related expenses, or put it back into the loan. If you use it elsewhere you would have a mixed loan.
     
  10. PC_USER_456

    PC_USER_456 Member

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    Thank you for the thoughts Terry.
     
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  11. Vlad.

    Vlad. New Member

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    Hi Terry,

    Thanks for this tip and all the great posts!

    I was just about to use redraw on our home loan to buy a car that I use for work. The work proportion is 80% though, and 20% is private. Should I avoid that and buy the car with my saved funds on an offset account instead? I was hoping to claim the 80% as the work proportion is tax-deductible, but I don't want to mix loans and make it complicated. Any tips?
     
  12. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Get some tax advice.
    Split the loan and debt recycle prob worth doing
     
  13. Vlad.

    Vlad. New Member

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    Thanks, Terry! Will do.
     
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  14. Spring_sun

    Spring_sun Active Member

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    Hi Terry,

    Thanks for the tip! As you pointed out, a lot of people made this mistake - me including! I wish I've got onto Accounting threads earlier, but alas. I'm trying to figure out the way that will draw the least amount of blood (money) out of me.:rolleyes:

    I read through the responses, and looks like splitting the loan is the best way to get rid of "tainted" loan balance. But what should be the balance of the split loans?

    E.g:
    Initial loan balance: $500K (P&I loan)
    Interest charges since the beginning of the loan: $40K
    Compulsory repayments since the beginning of the loan: $60K
    Additional repayments into the loan: $100K
    Additional withdrawals from the loan: $20K (for personal use)

    Current balance: 500+40-60-100+20 = $400K

    When I split the loan, what formula should I use?

    1) 500+40-60-100= 380K ( $380K fully deductible + $20K non/partially deductible)

    2) 500-60-100 = 320K ($320K fully deductible + $80K non/partially deductible)

    3) Something totally different?

    In other words, can we use Interest charges to increase our "clean" loan balance?
     
  15. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    I would say 3)

    You have to factor in when the withdrawals where made.

    SEe my other tip on splitting a mixed loan
     
  16. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Use for work... Driving to / from work isnt deductible. Logbook is required. If so, up to 80% of the interest may be deductible. ALL the loan for the car (not just 80%) should ideally be a short term loan. Otherwise if you split it so 80% its a seperate loan then you may only get 64% as deductible (80% x 80%) Otherwise do you want to buy a car on 25 -30 year finance terms. The interest will cease to be deductible long long before the debt is repaid. This is where a 4 year finance term is often wise provided no need for refinance etc in that time is affected by the servicing.

    I would entirely avoid blending the car with anything else for the above reasons. It may render the whole deductible as a compromised.
     
  17. Spring_sun

    Spring_sun Active Member

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    Yikes, that's what I was worried about. Thank you, will check out your Tips 44 & 45!
     
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  18. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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  19. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Redraws and repayments are like a ratchet. It progressively gets tighter and tighter. The deductible % and the portion of each repaymnet gets progressively smaller and smaller and each new drawing dilutes what was deductible so it shrinks. The more you do it the more it affects the rate of deterioration. And it can happen quite quickly.

    I described it some one the other day like reverse a poker machine. You put $100 in and after a while you dont know whats is your original stake and what is won, what is lost etc. I have never heard someone say - Actually I started with $100 and lost $85 and won $104 so I'm up $19. You have no idea if the $119 includes any original $$ or not. Its just all blended up.
     
  20. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    as long as splitting before redrawing shouldn't be an issue