Tax Tip 3: Mixing Loans - Don’t do it

Probably to get the tax advice first then see a broker.

 

Hi there,

Just wanting to confirm how best to pay out a tax dedutcable loan secure to a PPOR when moving to a new PPOR.

Lets say you have two loans secured against your current PPOR
Loan A - Original loan against your PPOR
Loan B - Loan taken out several years back against the equity in the PPOR for an Investment Property deposit

I now want to purchase a new PPOR, and sell the old one after settlement (have enough cash to cover the deposit and purchase costs of the new. i.e no bridging loan is required).

Obviously I don't want to pay out Loan B with cash and lose tax deductbilty. What's the best way to transfer the security of this loan to the new PPOR?

Is there any issue with getting the lender of the new PPOR to also provide a separate loan which would be used to pay out Loan B? Then effectively this new (separate from the PPOR purchase) loan is tax deductable.

Or am I better off arranging a security substitute between settlement of the new PPOR, and settlement of the old PPOR?

 

borrowing to pay out one loan doesn't change deductibility of interest, generally. So either borrow to pay out the loan or substitute security should work. Make sure you get tax advice to confirm.


This might help
Tax Tip 74: Selling a property that secures other loans Tax Tip 74: Selling a property that secures other loans

 

Hi!

I understand that the purpose of borrowing is the factor that decides whether the interest is tax deductible or not. Based on that I want to double check where I should "park" the money that I am about to get from the equity of my investment property (under my name) until a buy a new investment property in the future.

I've heard that to have an offset account linked to my investment home load is the best option but it is too late as I have a fixed rate 2 years home loan already in progress to settlement due to a recent refinance.

Then, these are options that I think I have and I would like to check which one works for my current situation:

• Personal Transaction Account (My salary get deposited there, I purchase food, etc)
• Personal Saving Account (It will be mixed with other savings)
• Joint Offset account of my Primary Place of Residence (My partner and I are the accountholders and this is my broker's preferred option as it will reduce my repayments but I am worried the tax implications of mixing the equity from my investment property (under my name) with an joint account (Partner and I )

Thanks

 

Gus you have a serious problem there! Sounds like you took no tax advice, or advice from a broker.

None of those will result in interest being deductible in my opinion, as a tax lawyer.

When you borrow and place the borrowed funds in an offset attached to the loan you just borrowed you can argue that the interest will still be deductible as you can trace it to the loan and there is no interest incurred until you withdraw from the offset. Even then I would suggest people put the money back into the loan and refresh it before use.

But when you borrow money and put it somewhere else that is the investment. Put it in a savings account - you are borrowing to invest in a savings account so at best the interest deductible up to the rate of the savings account 0.01% perhaps. But only if there is no other cash in the savings account.

If you put the borrowed money into an offset account on another loan there would be no chance the interest could be deductible because you would be incurring interest on the new borrowed money without income.

The only way forward is to break the fixed loan and pay the money back into the loan and then redraw to invest.

 

I understand that the purpose of borrowing is the factor that decides whether the interest is tax deductible or not

I think you have provided a perfect example of why this is NOT correct. The USE of the borrowed money for a deductible purpose determines if its deductible. A purpose is an intention. A use is a completed transaction or chain of transactions.

At present there is no deductible purpose and as Terry indicates that may be problematic for future deductibility too. The loan should not have been a fixed rate loan if the right sort of advice had been taken. The loan should be an undrawn facility or a LOC. Banks often advance the loan sum but a redraw facility MAY allow you to wholly credit the advance and leave it until you need it. Fixed rate loans dont allow these flexible features. The loan is likely the wrong product for your needs. I will bet you were enticed by the rate and not the features. This is why brokers have a higher duty now to ensure the right product is used. Its a invisible broker benefit where they share their wisdom, advice and knowledge for no client cost.

 

Thanks Terry and Paul. I think that my broker just gave his recommendation without taking into account the problem around tax deduction.

 

Basic question regarding this topic, Today is the monthly cycle for our home loans.

A few weeks ago I spoke with the bank requesting a lower rate (was 3.17%, now 2.94%).

- Interest rate to be back dated to dqte of request (Tick)

- It will begin on or after your next statement / monthly cycle (Tick: Already changed as of today)

- Any difference in interest changed will be refunded (no issue, done today).

My question: Investment loan is today officially in credit $5.40. Thus now a mixed loan.

Do I need to do anything, can I get the credit transferred to another account (offset, ppor loan)?

All was done today, as interest is charged on the 14th of each month. Would I be forgiven by the ato / law in regards to "spending" $5.40 to make my balance go back to $0.00 redraw?

 

If the loan is in credit you mean you have paid more than is required. You are in advance. Dont draw that out. Then it is a blended loan.

Paying down the loan (credits) doesnt blend a loan. Drawing new borrowings (any debits) from the account do.

 

And thats fine. Its not like you expect them to be able to advise on tax issues. But a knowedgable broker should see the issue and at least say - You may want to discuss that with your tax adviser.

 

Hi Terry, I came across this webpage which appears explaing mixing loans using your example, and almost like for like wording:

Why Mixing Loans Is A Bad Idea

Just wanted to flag it with you in case you were not already aware.

Cheers

 

Thanks Broc. It seems like plagarism. If this was a uni assignment Richard Suttie would fail - and be kicked out of the course.

 

Hi @Terry_w @Paul@PFI

I am new in the home loan world. I am currently refinancing my existing 2 yr old PPOR home loan to get take advantage some cashback and slightly lower rate. My outgoing loan is a loan with offset account package whereas incoming loan is a simple loan with lower rate & redraw facility but no offset account.

After reading online about safety/availability of redraw balance, i made my way through several forums and found myself in here and found a fair bit of gems.

I am happy in my existing property but I can't help wonder what the tax implications would be in say 10 years time if i decide to make it an IP.

I underestimated the possible long term drawbacks of not having an offset account and parking extra cash in the home loan account with redraw facility temporarily.

It seems I was incorrectly assuming that not having an offset account & redrawing does not affect interest deductibility in the future if I refinance into a package with offset account later on and then eventually do another refinance in the event I turn my PPOR into an IP (ie once mixed, refinancing a few times will not unmix and reset deductibility for redrawn amounts that were redrawn for non-investment purposes).

In terms of figures: outgoing loan package: loan amount balance ~-412k, offset account balance ~115k.
I have about $30k in shares in a private company that I've paid for in cash.
After seeing some of the threads about debt recycling, I feel motivated to invest a bit more once the world/covid situation stabilizes.

Is the only option to avoid mixing of loans, to park the funds I had in the offset account in a separate bank account and use this separate account to receive salary and do all transactions rather than using the home loan account with redraw facility for everything.
Then refinance to a loan package with an offset facility asap and only do extra repayments into a home loan account after doing splits that match the extra repayment amounts that will be redrawed for investments like shares or IPs?
Is there another option that ensures there is no mixing whilst allowing for less interest payment?

It looks like it is simpler and more flexible to plan ahead with one's first home with a loan product that has offset facility even if it's a bit more expensive.

thank you

 

The only option is to avoid paying into the loan and redrawing later - if you do it will be mixed. You also have to consider whether to pay down the non-deductible debt if you think you might rent the property out in the future

 

thank you @Terry_w

 

What if due to timing ie settlement is nearing one pays into PPOR loan and then redraw and then split it.

Eg. A pays $13k into PPOR. $13k is then redraw to pay for IP investment deposit. Then $13k is split out with a separate loan number.

So it's pay - - > redraw - - > split

Instead of

Ideally split - - > pay - - > redraw

I know it doesn't seem ideal but not all banks are quick in terms of splitting account ie they make take a few days to process.

 

I have covered that in one of these:

Tax Tip 67: Using Redraw Facilities on loans and Tax Issues Tax Tip 67: Using Redraw Facilities on loans and Tax Issues

Tax Tip 6: Using Redraw to invest Tax Tip 6: Using Redraw to invest

Tax Tip 44: How to Un-Mix a Mixed Loan Tax Tip 44: How to Un-Mix a Mixed Loan

 

Yes I have read that the ato allows you to notionally unscramble an egg.... But am just unsure whether my method is the correct way? My approach above is how I have interpreted your tax tips post.

 

Not sure what you mean, but if you redraw before splitting you can refinance and split into the relevant portions. Best to get specific tax advice

 

Must it be a refinance though? What if I redraw first, split after and no refinance and still same bank? Pretty sure that's OK from what I read from your posts