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Tax Tip 20: Never use a LOC as the main loan!

Discussion in 'Accounting & Tax' started by Terry_w, 17th Aug, 2015.

  1. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Never use a LOC as the main loan!


    Just remember:
    • Depositing money into a loan is a permanent repayment to that loan.
    • Withdrawing money from a loan is new borrowings

    What this means is that if you start off borrowing $100,000 to buy a house and you pay down the loan to $99,000 the amount of the loan associated with the purchase of the house is now $99,000.

    If you later withdraw $100 to buy some groceries the balance will be $99,100 but it is now a mixed purpose loan with $99,000 being for the house purchase and $100 being for the private expense of groceries.

    As time goes by further deposits will make things messy and further withdrawals even messier.

    At the end of the day you could have a loan of say $80,000 but none of the balance relating to the purchase of the house.

    Normally this will not be an issue but if you ever rented out the house none of the interest on the loan would ever be deductible.

    So avoid using a Line of Credit loan as the main loan where income will be deposited and expenses will be withdrawn. There used to be debt reduction companies pushing this strategy - which is a great strategy for paying off a loan, but terrible from a tax point of view.

    The same benefits can be obtained by using a 100% offset account to save interest and there are no tax issues when money is withdrawn from the offset. Best of both worlds.

    LOCs should only be used to access equity for further investing.
     
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  2. chylld

    chylld Well-Known Member

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    Terry do you have a table of contents for all your tax tips? They are incredibly useful and should be required reading for members like myself who want to learn all the things!!!!1
     
  3. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Tax Tip 1: Parking borrowed money in an offset account
    Tax Tip 2: Debt Recycling
    Tax Tip 3: Mixing Loans - Don’t do it
    Tax Tip 4: Borrowing to Pay investment expenses
    Tax Tip 5: Reimbursing yourself - Impossible
    Tax Tip 6: Using Redraw to invest
    Tax Tip 7: keep All Receipts forever
    Tax Tip 8: Forgotten land Tax
    Tax Tip 9: Don’t use Cash in Offset account to Invest
    Tax Tip 10: Offset in the name of the lower income earner
    Tax Tip 11: Further Borrowing against property deductible against the income it generates
    Tax Tip 12: Credit Cards and Tax Issues
    Tax Tip 13: Simple Loan Structuring Strategy
    Tax Tip 14: Never ‘Park’ money in a loan
    Tax Tip 15: Transfers for No Consideration and Deductibility of Interest
    Tax Tip 16: Capitalising Interest
    Tax Tip 17: Divorce and Deductibility of interest
    Tax Tip 18: Strategy to Increase deductions on Divorce
    Tax Tip 19: Avoid Using Redraw on an Owner Occupied Loan
    Tax Tip 20: Never use a LOC as the main loan
    Tax Tip 21: Tax Advantages of Buying property in 1 name only
    Tax Tip 22: Security for a loan does not determine Deductibility of Interest

    I started keeping an excel spreadsheet with a list of the tax tips and the legal tips as well. I will post this on one of my websites eventually.
     
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  4. chylld

    chylld Well-Known Member

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    Macq just charged the $199 bi-annual LOC package fee to my main PPOR LOC split, raising the balance by $199.

    Will this contaminate the purpose of the main split should the property become an IP later on? Seems like a direct property-associated cost to me...
     
  5. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    lol! No, just don't claim the interest on it.
     
  6. chylld

    chylld Well-Known Member

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    so that means I'd have to apportion the interest between the original split amount and the new $199?

    sounds like a hassle, I'd rather just pay the $199...
     
  7. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    No, i was saying don't claim the interest. Just apportion the $199.
     
  8. Scott No Mates

    Scott No Mates Well-Known Member

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    How do you then convince the ATO auditor in 5 years time that the $199 payment was for the facility fee and not repayment of the loan?

    (Just to illustrate @Terry_w 's point).
     
  9. chylld

    chylld Well-Known Member

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    So say there's $50k interest in a financial year after it becomes an IP; I ask the accountant to only claim say $49.9k of it?

    Is repayment of the loan a bad thing? I understand it will reduce the amount of tax-deductible interest in the future, but that's pretty clear cut and I'm not worried about it. Part of my plan to pay it down actually so I can split off investment LOCs as separate accounts (LOC package so I work with an overall limit)

    What I am worried about however is whether the $199 fee has now contaminated the loan forever, requiring apportioning of interest every future tax return.
     
  10. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    No you would claim the lot.
     
  11. chylld

    chylld Well-Known Member

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    So the $199 is essentially capitalised as an IP expense (but incurred when it was a PPOR)?
     
  12. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    I would think it is an expense associated with the purchase of the property so any interest on money used to pay it should be deductible when the loan relates to the production of income.
     
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  13. chylld

    chylld Well-Known Member

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    Yep just got confirmation from my accountant that it's fine; won't complicate deductablity at all. Phew :)
     
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