Tax Tip 304: Split Loan as Needed Rather than a Big Split when Debt Recycling

Yesterday I came across someone who did some debt recycling before taking advice. He had inadvertently reduced the amount of tax he could claim because he had split the loan, but debt recycled in stages.

When debt recycling you should always split and then pay that split right down before withdrawing. If you pay part down and redraw and then later pay more down and redraw you are mixing the loan.


To avoid this, it is best to split loans into portions as you need them and go at it in stages.


Debt recycling involves tax advice, so make sure you take this advice from someone qualified and licensed.


Example

Bart wants to debt recycle $100,000 of his main residence debt into investments so he splits his $500,000 loan into:

· Loan A $400,000 and

· Loan B $100,000

Then after splitting he decides to invest in $20,000 chunks.

He takes $20,000 cash from his offset and reduces Loan B to $80,000 and then redraws $20,000 and invests.

A month later he is about to do the same again, but realises Split B is now mixed. Part of it relates to share purchases and part relates to the purchase of the house and is not deductible.

Therefore, Bart would first need to split Loan B into $20,000, and $80,000 portions. If Bart didn’t do this when he puts the further $20,000 into Loan B it would be reducing both the portions of the loan, the deductible portion and the non-deductible portion

 

Terry - I think I have a tip #305

When you draw a new loan, refinance any loan, split a loan or you discharge a loan ensure you retain all statements AND supporting evidence of what the borrowing was used for permanently. Keep this apart from deduction records ie it is additional. Keep this as a permanent and continual record of all loans.

On each statement (mark-up the PDF or also maintain a CSV or excel summary) note the following
1. For a clean split for a specific purpose note what that purpose was and retain associated evidence eg New kitchen cost invoice
2. For a blended split ensure every DEBIT (ie new advance) is either a refinance of a former loan or is also supported wih supporting evidence. Dont worry about the obvious eg bank fees and interest charged. If the debit to one loan and a credit to discharge another are not the same amount ensure you have reasoning and can explain this. eg New loan #3 was used to repay old loan #1 and Old loan #2.
3. Each time a debit occurs re-calculate the % deductible for any blended loan and progressively repeat for future debits
4. Repayments to a blended loan CANNOT be allocated to just one specific use. The % in 3 above is continually maintained.

When the ATO review one or all properties or any interest deduction they will request and expect to see a complete and continued trail of evidence from day #1 right through to present day. Poor records could see their review "expand" and then cover all loans and purposes. They specifically will review any debits on a loan account and if supporting evidence isnt provided they will deny a portion of the interest. They will do this for trivial amounts so its not going to be ignored. If the blended % cant be easily determined this places the whole of the interest deduction at risk. Clients who follow my advice for 1, 2 3 & 4 above have never encountered a ATO concern.

I regularly encounter people who tell me they refinanced a loan and can no longer access old loan accounts. The ATO can so you can too ! The ATO may just deny deductions. Access to old loans and accounts can be very expensive too. So maintain it from day #1.

 

I say keep all receipts forever. Even for the main residence and non deductible loans it could come in handy

Tax Tip 7: keep All Receipts forever https://propertychat.com.au/community/threads/tax-tip-7-keep-all-receipts-forever.2285/

 

Ive had a couple of people contact me over this thread. They were debt recycling but paying down the loan in stages.

This is a related thread about how you can work out the portions on a mixed loan. You would need to do this, split the loan and then try to avoid mixing further going forward

Tax Tip 45: How to work out the Portions of a Mixed Loan Tax Tip 45: How to work out the Portions of a Mixed Loan

 

What would be a reason to keep receipts for PPOR Terry?

 

You never know, you might decide to claim another property as your main residence

 

Just had a quick look at this new vid (split loan)

 

What if you make a big split but purely use that split off investment purposes in stages? Meaning no part of that big redraw split is used for personal purposes. Will that be OK then?

 

That could be ok, depending on the circumstances.

 

Income producing circumstances of course

 

there is a bit more to it than that!

 

Hi @Terry_w ,

Lets say I have a $500k loan with the following splits at the start of application. I want to debt recycle $300k.

Loan A - $200k, P&I, with offset A
Loan B, C, D, E, F, G, $50k each, with offset B, C, D, E, F, G, for debt recycling

#1 - While saving $50k at a time, I should park all the money in offset A and not in the smaller splits to avoid contamination right?

#2 - for sure I won't do extra repayments for the smaller splits to maximise deductibility, right?

#3 - and extra repayments on the smaller split will also mix the loan, right?

Thanks

 

Saving in an offset won't contaminate the loan unless you have borrowed money in that offset

 

I'd only have one offset account (if you can). Call it account H. It offsets loan B until you fill it up. Do your DR with loan B. Then call the bank and ask them to point acc H to be offsetting loan C. And so on.

 

One offset is preferred. Maybe two.

If you have non-deductible debt then the offset should (only) be against that loan. If you have no non-deductible debt then offset a deductible loan.
Borrowed $$$ should not be mixed with savings
Borrowed $$$ should not ideally be in a offset. A undrawn loan is better than a loan and a matched offset.
Before putting offset money back to a loan check on the redraw rules.

 

Thanks @Terry_w , @ShireBoy and @Paul@PFI ..

Just to add more context, this is a PPOR and no plans to move out and to rent it out. No plans to buy investment property as well. Plan is to debt recycle the loan and buy diversified shares.

Back to the $500k loan splits:
- Loan A - $200k, P&I, with offset A (everyday transaction account for salary, extra income, savings, bills, etc...)
- Loan B, C, D, E, F, G, $50k each, P&I, with offset H (investment) for debt recycling

I think offset H is only needed if Loans B-G can't do redraw and can't do fund transfer directly to the trading settlement accounts.

#1) Let's say offset H is needed for the fund transfers between Loan B-G and the trading accounts. Does it matter if I put the savings here? Or it is better to put in offset A? Anyway all loan splits are P&I and have the same interest rates.

#2) For sure I need to zero offset H before I redraw Loans B-G to avoid contamination?


Otherwise if offset H is NOT needed and I only have offset A, then I would put everything there. Pay Loan B-G up to least amount that won't close the account. Then redraw as much as possible directly to the trading account.

Regards,
Val

 

1 yes
2. yes
3. yes

 

I recently refinanced my PPoR home loan with multiple splits to AMP (with the Master Limit facility).
One of the splits, which I created a couple of years ago for 82k was used to buy 82k worth of dividend producing shares so I could claim the interest. The balance of this split was 79k when I refinanced as it was on P&I.
Having now refinanced, it seems the broker refinanced this split at 82k.
1) Is this going to be a problem for tax deductibility?
2) Should I lower this split down to 79k (and increase one of my other splits by 3k)?

 

1. yes, where did the extra $3k go? mixed loan
2. you would need to split before reducing the loan.
prob best to just claim 79/82th of the interest going forward.

 

Thanks, such a shame I didn't notice this earlier (my mistake for not checking!).
1) Given the master limit and the ability to decrease and increase the splits, if I send a form to AMP to reduce the 82k split to 79k and increase another split from 400k to 403k, would that be sufficient?
2) Is that what you mean by the need to split before reducing the loan?