Tax Tip 3: Mixing Loans - Don’t do it

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

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  1. Terry_w

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

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    a refinance is paying one loan out with another.
     
  2. Larry's Bird

    Larry's Bird Member

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    Hi @Terry_w , I have been silently following your posts and tax tips in this forum and I find them really really helpful. I am at a point where I think I'm ready to purchase my very first investment property and would like to make sure I do it correctly when I take the plunge.

    Below is my current situation:
    • I have an existing loan for my PPOR here in VIC. It has a redraw facility but no offset.
    • Original loan amount was ~$1.03M. Current loan balance is ~$780k. There is ~$200k sitting in the redraw facility
    • I have engaged a local broker who is currently helping me with pre-approval for an investment loan to purchase an investment property
    • The bank has valued my PPOR at $1.45M
    • My broker has proposed that once I find a property I like, I can pay off the deposit using the amount I have in my redraw, which will later on be returned to me once I get the proceeds from the new investment loan.
    If I can get some tips here on how to go about this that will be great, otherwise, I have also sent you an email if you think what I need is a more formal tax advice. Thanks in advance!
     
  3. Terry_w

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

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    wow. How on earth would this work and imagine the tax consequences.

    Tax Tip 5: Reimbursing yourself - Impossible Tax Tip 5: Reimbursing yourself - Impossible
     
  4. Baker

    Baker Well-Known Member

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    My tip: Get a different broker.
     
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  5. Larry's Bird

    Larry's Bird Member

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    Thanks @Terry_w ! I looked up your previous post on ideal loan structure and asked my broker to use that as the guide. This is now the proposal on the loan split:

    Loan 1 will have an Offset account/free redraw, with my existing PPOR as security

    Loan 2 is an investment loan split (plus additional equity) from my exisiting PPOR loan and an Offset account attached to it as well where the loan proceeds will be sitting in to fully offset the interest on Loan 2. This means there would be no repayments due until you have used the funds in the Offset account to finance the deposit and upfront costs once I buy an investment property

    Loan 3 would proceed as investment loan once I have purchased a property.

    Will using an offset for Loan 2 be an issue?

    Thanks in advance!
     
  6. Terry_w

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

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    That is a very broad question. there would be a number of issues.
     
  7. Larry's Bird

    Larry's Bird Member

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    Apologies of it was too broad. Trying to be more specific, will the offset account created for for Loan 2 suffice for tax deductibility purposes if I make sure the money there is used exclusively for the investment property and no other funds are deposited/mixed in there?
     
  8. Terry_w

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

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    Are you asking me for specific tax advice? I won't give that but will point you to
    Tax Tip 1: Parking borrowed money in an offset account

    https://bit.ly/33l4o4c
     
  9. Rustyp

    Rustyp Well-Known Member

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    Hi Terry, I’ve just come across your tax tips which have given me a much better understanding of issues I knew nothing about before. I was wondering if you could have a look at my situation and tell me if the approach I’m planning is the best strategy, and if there is any nuance I need to be aware of.
    Figures are approximate.

    My scenario:
    I’m New to IP, I own a PPOR worth around 1.1 with a loan outstanding balance of 500k (never redrawn) and 450k savings in an offset account. I plan to purchase a new PPOR worth 1.2m fully financed by the bank and retaining my current PPOR as an IP. If I understand correctly what my lender is telling me, I will end with a loan split between IP (500k) and PPOR (1.2m) where the LVR is calculated on the basis of the total loan (1.7m) against the total value (2.3m), around 74%. I will at that point associate the offset account to the new PPOR.

    Question 1:
    Can I claim as deduction in this way the full interest on the 500k when the property becomes an IP?

    Question 2:
    Is there any way of increasing the claimable borrowing (IP) against the non-claimable one (PPOR) without selling my current PPOR and purchasing a new IP fully funded by a loan? It really hurts me having to spend 80k in fees and duties to do this. Also we would like to keep the option open to move back into the old PPOR in the future, even if it’s highly unlikely.

    question 3:
    If I refinance the current home while is still PPOR (new loan, not a redraw), don’t use the money for anything and leave it in a offset account, can I then deduct the interests on the full loan or only the original 500k.

    Thanks in advance.
     
  10. Paul@PAS

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

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    1. Its should be. However past factors could affect that view.
    2. Unlikely. You cant increase loans without a new acquisition. However minor things like borrowing to pay some outgoings (not interest / loan) could marginally enhance future deductions at a slow pace. Consider a QS report for the former home. Only Building works will be eligible.
    3. No. The USE of the newly borrowed funds has no nexus to acquisition of the IP. You would actually harm the offset and its deductible part for the $500K. ie its blended.
     
  11. Rustyp

    Rustyp Well-Known Member

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    thanks for the reply, much appreciated. Can I ask a couple of clarifications?

    What are these factors?

    Sorry if it’s dumb question, I’m a newbie, but what’s a QS report, and how would I use it?
     
  12. Paul@PAS

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

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    1. "Past factors"...eg Was $50K of the original loan to buy a car ? So now a % of that loan isnt deductible as that part of the loan is private. What % ?
    2. Quantity Surveyor tax report. Deductions for building depreciation.
     
  13. Terry_w

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

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    I can't do that, but I can answer your questions

    If this loan relates solely to the purchase or improvement of the property then potentially yes

    Yes
    Strategy: 11 Strategies for when you move out of the PPOR and keep it Strategy: 11 Strategies for when you move out of the PPOR and keep it

    You would be borrowing to park the money in the offset so no extra interest to deduct. But you now have a mixed loan which would need apportioning if you removed the money from the offset or deposited money into it.

    Best to get some tax advice
     
  14. Rustyp

    Rustyp Well-Known Member

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    Thanks for answering my questions, much appreciated. I’ll definitely get tax advice, but to get ready to talk to the bank on Monday about the loan offer, I’d like to clarify some of the details related to question 1.

    I understand that the eligibility of the existing loan for full interest deduction depends both on what happened in the past and what will happen in the future.

    Past actions: the loan was taken to fund exclusively the purchase of the property and nothing else (car etc.). It was associated from the beginning to an offset account which was used for all my regular money transactions. A year ago it was renegotiated with a different bank purely to get a better interest rate, with a small reduction in borrowing to stay within a certain LRV which would give a slight lower interest rate. Again this was associated against 3 offset accounts (just so we could separate finances between regular transactions and savings). Based on this, at this point in time would the interest be fully claimable if the property becomes an IP and the offset accounts are no longer associated with this loan?

    future actions: the bank told me that, for the purchase of the new PPOR, they will convert my current loan into a split loan, with one split covering the current loan and the other to cover the full purchase price of the new property, including a refund of the deposit initially paid with some of the savings, plus duties and legal costs. At this point The offset accounts will be disassociated from the first split and associated with the second split. Initially both the loan splits are going to be owner occupier loans as the sellers will rent back their house for a couple of months, and as soon as we move into the new property and rent the existing one, then the first split will be converted to an investment loan. If I do this, will I be able to claim the full interest paid on the IP, ie our previous PPOR?
     
  15. Terry_w

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

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    Does that loan relate solely to the purchase or improvement of that property is what you have to ask yourself.
     
  16. Rustyp

    Rustyp Well-Known Member

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    The answer to that question is yes. It’s just that I’ve been reading some of your your tips and other threads and a common theme is that the advice that lenders and brokers give is often counterproductive for the customer. So I’m wondering if what I have been proposed by my bank in itself could have any negative effects on my ability to claim in full the interest on my future IP. Is that the case?
     
  17. Rustyp

    Rustyp Well-Known Member

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    Hi Terry, I’ve emailed you yesterday to enquire about becoming a client, I was wondering if you have had a chance to read my email yet. I know it might be too late now, but I’ve just gone unconditional on my next PPOR and would like to talk at your earliest convenience if it’s possible to structure the loan, and my assets in general, in a more efficient way, as the contract will settle in a couple of months, therefore I still have a little time for that.
     
  18. Terry_w

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

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    Hi Rustyp

    We are not returning to work until next monday. I get around 10 enquiries per day so will not be sure which email is yours, unless Rustyp is your real name? So could you please send again and I will prioritise it
     
  19. Rustyp

    Rustyp Well-Known Member

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    Sorry, straight after posting I realised that you would have no way to work out which email had been sent by me....... :)

    I'll re-send you another email between tonight and tomorrow with my username Rustyp in the subject, so it will be easier to find it amongst the others. I'll probably also add some more context about my personal circumstances and what I'm trying to achieve, from a general perspective.

    In the meantime, the pressing issue I'm facing at this moment is related to the purchase of a new property as my next PPOR, as described in my original post, which I have quoted below for reference. I have now the answers to the questions I originally asked, but at the moment I'm concerned that there might be a more effective way of structuring the loan, compared to what I have been approved for unconditionally by my lender, as detailed below.

    Also, as far as I know, my lender is one of the very few banks which offers offset against a fixed rate loan, therefore I have locked with them a 3 years fixed rate at 2.5% with offset for the PPOR loan split, but again I'm wondering if I should go for a variable rate instead as, if a more effective borrowing strategy entails repaying and/or redrawing money from the loan, this would incur in a break fee with the fixed rate loan, which could exceed $10,000 depending to what happens to interest rates. A variable rate loan would give me much more freedom in this case. Just to be clear, I'm not asking to forecast what will happen to interest rate, only if the borrowing strategy will entail repaying and/or redrawing money from the PPOR loan split.

    I hope all this makes sense.

     
  20. Rustyp

    Rustyp Well-Known Member

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    Ideally, I would want to "transfer" all the equity I have in my current PPOR, which will become an IP, into "good debt", and minimise all the "bad debt" of my next PPOR which initially will be 100% LVR. I've been told I could do this by borrowing to purchase shares, then sell those later on and use the equity to repay the PPOR loan, but I'm not entirely convinced that the interest will still be deductible after I've sold the shares......