Tax Tip 3: Mixing Loans - Don’t do it

Hi question please,

If an IP loan with offset is used solely used for investment property (down deposit, IP maintentenance), can I use money sitting in offset account to invest in stocks/cryptocurrencies? Will that make it a mixed loan?

Thanks in advance

 

An offset is a savings account not a loan.

Tax Tip 82: Taking money from an offset account on an IP and Claiming Interest Tax Tip 82: Taking money from an offset account on an IP and Claiming Interest

 

Thanks Terry. Even if the offset money "unused debt" from the bank and not from my repayments?

 

You have borrowed and parked this money in an offset? Did you get tax advice?

Tax Tip 1: Parking borrowed money in an offset account Tax Tip 1: Parking borrowed money in an offset account

 

Yes you can use the money to invest in stocks (or gamble in crypto) - it will be just as if you used cash from any other savings account.

The loan itself will retain its original purpose with corresponding deductability.

 

yes, I did actually. And everything was setup correctly and made sure no non-IP transaction are there with the offset.

I just wanted to know if ATO is concerned about identifying/disecting which type of investment I was using the debt money for - either be stocks or IP or it does not matter on their part

 

Thanks for this. So if loan is $100K with parked borrowed money $50K in offset, if i use that $50k for stocks/crypto then the interest that I will pay for the entire $100K loan will be tax deductible? I do not need to specify which one is used for IP and which one I used for other investments?

 

If you have set it up correctly then think of the offset as if it was a LOC. If this and the original drawn money was used for different purposes then it will be a mixed loan. But this may be no big deal where both purposes are investment and the entity is the same on both uses.

See my later tax tips on mixing

 

If the funds in the offset are borrowed from the loan (as Terry asked) then it's quite messy even without mixing purposes.

I would strongly recommend a separate split for different asset classes. Crypto in particular is treated as a CGT asset so the interest and other holding costs are capitalised and added to the cost base of your crypto "investment". This differs from say LIC shares which regularly pay dividends and are thus an income producing investment.

As a result, if you mix (ignoring complications from parking borrowed money in the offset in the first place) only the interest incurred from income-producing investments will be deductible on an ongoing basis - so you will have to apportion interest.

 

Hi @Terry_w , if someone refinances their ppor home loan, and creates two splits, with one split the money is invested into a business. Can the interest payable on that split be deductible?

What if that money stays in the splits offset account for a couple of months before going into the business?

Or if that money is transferred to a family members account first before going into the business?

Or the money is transferred to a family member, then back to the offset acct, then transferred to the business?

I am starting a business, but dont have a business account to put the money into, and wont until a couple of months after the finance has settled.

I have an accountant/lawyer, but wanted to see yours and the other experts on heres, opinions first

 

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A business is not an entity, but something an entity does. If you borrow money in connection to conducting a business the interest could be deductible.

If you borrow money and a company uses that money to conduct a business the interest cannot be deductible to either you or the company unless the company borrows it from you on appropriate terms.

See tax tip 1 for the offset bit

Not sure what you are implying about transferring money to someone else but if you borrow to do so the interest will not be deductible

 

Thanks Terry. I guess i am trying to work out a way to be able to deduct the interest on the portion of my refinance that is going to be used as starting capital for my new business venture.

We are about to set up a weave of company/ trust entities, but didnt want these on my credit file, as was told these on my credit file could negatively affect the refinance application. So won't go live until refinance settles.

I cant open a business bank account to transfer the refinance money into until the business structure is live, and the new bus bank assesses the structure. So prob about 2 months after refinance settles.

Not sure if it will be a loan to the company or purchasing shares, or both.

Not sure if the interest on my ppor loan that will be put to the business is even deductible to me personally.

Does this make sense? What do you normally advise your clients to do when they refinance their ppor and use the funds to start a company? Have you got a tax/legal tip for this?

I found this one Legal Tip: Funding a New Company Running a Business which is similar but a little different to my situation.

Thanks

 

Trusts dont go on credit files. Directorships will appear though.

If you borrow and someone else is running the business the interest cannot be deductible to either you or the someone else. You have to be careful that any expense isn't too preliminary to the income and promotors of companies can contract on behalf of a company about to be formed.

You need to consider asset protection issues as well.

What will the borrowed funds be used for before the company is set up?

If you are borrowing money and it will be used by a company you will need to lend that company the money, or perhaps use that money to acquire shares in the company. I am sure I have written both tax and legal tips on this.

Seek legal advice..

 

Thanks @Terry_w

The borrowed funds i believe will sit in the offset account once refinance settlement occurs until there is somewhere for the funds to go. We plan on going live for the company/trusts on 1st july, then organise a business bank account with bendigo bank, which we were told would take 2-3 weeks while they examine our entity structure.

We have an accountant and lawyer, but i havent gone through the refinance stuff with them yet.

 

My tax tip 1 covers the offset issue.
your refianance is a separate issue to the company or trust - not directly related

 

If you rent your ppor out with a mixed loan as it was a redraw for 6 months but then turned back to a offset. The house is half paid off what deductions would I actually be missing out on? just cant claim interest on whats left of the mortgage?

 

If the loan relates to the purchase of the main residence it would be deductible interest. but if redraw has been used you would have to apportion it.

see
Tax Tip 189: Moving out of the Main Residence – When can you claim Interest on loans? Tax Tip 189: Moving out of the Main Residence – When can you claim Interest on loans?

 

So i need to go through my statements and work out the total money I re-borrowed from using the redraw for bills and separate it from the rest of the ppor mortgage?

 

Yes, it will be a complex task. Bantacs have an excel calculator you can purchase to help work it all out.

 

Then see a broker to split then a tax accountant to double check?