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. Baker

    Baker Well-Known Member

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    I like bread
    It won't.
     
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  2. janezzy34

    janezzy34 New Member

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    Hi Terry

    Hoping you might be able to confirm my understanding of tax implications here. I have an IP with about $200k equity in it that I want to tap about $80k to assist in a deposit for a PPOR (we recently purchased a PPOR here in CBR, but job opportunities are moving us to a different city and we’re not keen to rent so exploring opportunities to purchase in the new city).

    My understanding is that the equity should be drawn out as seperate to the existing loan over the IP, so that the interest on the existing loan remains tax deductible (I understand the equity loan for the PPOR is not tax deductible). Therefore there would be two loans utilising the IP as security - Loan A (original/tax deductible), and Loan B (equity/not tax deductible).

    I’m wondering if other expenses associated with the IP, such as rates, agent fees, water etc. remain 100% tax deductible, or are they proportioned to the amount of the property that is used for IP purposes?

    Thanks in advance for any assistance.
     
  3. Terry_w

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

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    To the extent that the expenses relate to the property they would be 100% deductible if the property is income producing.
     
  4. Szbrown

    Szbrown Active Member

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    I need help with un-mixing a loan,

    I followed the tips here and split a 100k loan, into 75k and $25000.95
    I purchased 24,970.81 of shares, put 24970.81 into the 25k loan, redrew it, paid off the $30.14 so that $24,970.81 was owing.
    All good so far

    However my bank made the 'new' split the 75k loan, so the split loan was the 'old' loan, and I got charged $184.48 in interest from the previous month.

    No idea how to split it now, it's 25 days since I got charged the $184.48.
    Do I deposit $184.48 now, and work out 25 days * ($184.48 * (2.8% / 365)) and deposit that also? Would that un-mix it?

    It would be $184.48 + $0.35 (the interest so far on the 184.48 for the month).
     
    Last edited: 26th Apr, 2022
  5. Terry_w

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

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    DO you mean you bought shares before you put $24,970.81 into the loan?
     
  6. Szbrown

    Szbrown Active Member

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    Sorry I understand how that would be confusing.

    I used the money I redrew to buy the shares.
    There is a 3 day settlement with commsec, so that allowed me to set up the purchase of the shares (so I knew the exact amount), then I withdrew the amount needed from the loan and transferred it directly to the account to pay for the shares
     
  7. Terry_w

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

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    So you bought the shares using a loan from CBA which you then paid out by drawing on a loan from your new bank, but took it from a $75k split by mistake? Now you would need to split the $75k loan - actually refinance it into 2 separate loans, if you wanted to segregate it. But if the other $50k or so hasn't been used there may be no issues.
     
  8. Paul@PAS

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

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    At worst sounds like if you transferred $25K from the $75K loan instead of the $25K split then this can be fixed. Draw $25K from the $25K split and pay down the $75K split ....its a "refinance"and will ensure it right for future.
     
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  9. Szbrown

    Szbrown Active Member

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    This is what has occurred, I have only used CBA.

    100k Loan -> 25k loan
    -> 75k loan (new split loan)

    Therefore the 25k loan still had interest owing from preivously being the 100k loan in the last month. Which was $184.48.
    I wanted to make the 25k the 'new split' however the bank didn't process it that way for some reason. I'm wondering if the $184.48 interest from the previous month will mix the loan.
     
  10. Paul@PAS

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

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    Not if its paid or refinanced with the $25K. You shouldnt be capitalising interest. Its incurred when the bank charges it.

    Probably a sign you need some tax support.
     
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  11. uskam

    uskam Active Member

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    Hi @Terry_w,

    Would the below be considered a mixed loan for split 2 and 3? For example, debt recycle PPOR to the below:
    - Split 1 - 150k PI PPOR loan
    - Split 2 - 200k IO loan for upfront cost to purchase IP (deposits, stamp duties, BA fees, etc) - I believe some of these like BA fees are non deductible, is this considered mixed?
    - Split 3 - 100k IO loan for shares (5k for financial planner fees, 95k to buy shares etc) - Again, i believe FP fees are non deductible, is this considered mixed?

    Apologies if it has been covered elsewhere. I have tried searching for some of the other posts and tax tips but have yet to find it. Thanks.
     
  12. Terry_w

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

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    You can still borrow for costs that are not deductible and to claim the interest on that loan if those items are used to produce income. Borrowing to buy property for example. The property is not a deductible cost but if it produces income the interest can be deductible. Stamp duty is not a deductible cost but if it relates to an investment property the interest on a loan used to pay it can be deductible.
    These are capital costs.

    So those splits don't appear to be mixed in terms of different uses.

    I am not sure on the financial planner fee though. It will depend on what it relates to. Often plans will cover multiple areas such as life insurance and/or super. If it relates solely to the shares being bought then I think the loan would not be mixed if you borrowed to pay it, even though the fees themselves may not be deductible
     
  13. uskam

    uskam Active Member

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    Thanks Terry. That clears up my questions on Split 2. In summary, interest on the loan ($200k) is fully tax deductible as it is used to purchase an IP (income producing). However, capital costs related to the purchase (e.g. stamp duty, BA fees, etc) are not deductible. Am i correct to say that this is the right approach to use borrowed funds for the non-deductible items, reasons being:
    • Don't have to use cash savings, more cash buffer
    • Interest on the borrowed funds used for the capital expense is deductible although not able to claim the capital expense itself
    You are right regarding FP. It will entail a mix of products/services (e.g. cash flow and budgeting planning, debt management planning, investment advice which may lead to investing in shares/managed funds etc, insurances, etc) . If that is the case, then I'd imagine it will be considered mixed? Does it then mean I cannot claim for the FP fees and only 95% of the interest on Split 3 becomes deductible?

    Currently, our dilemma is whether to use cash savings to pay for the FP fee or use part of the Split 3 loan to cover the fees (e.g. in the case of Split 2 for BA fees).

    Once again, thank you for your insights.
     
  14. Terry_w

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

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    Considering the interest on $5k is going to be very small I would use cash rather than create a mixed loan as it will be the simplest solution.

    But no point in using cash for the other investment expenses if you have the ability to borrow. Its a form of debt recycling if you have non-deductible debt too.
     
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  15. uskam

    uskam Active Member

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    Thank you @Terry_w. That makes sense.
     
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