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

Discussion in 'Accounting & Tax' started by Terry_w, 2nd Oct, 2015.

  1. Terry_w

    Terry_w Structuring Lawyer and Finance Broker - all states Business Member

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    How to Un-Mix a Mixed Loan

    You cannot unscramble an egg, but you can unmix a mixed loan.

    ATO allows a mixed loan to be separated into 2 or more loans so that it is no longer mixed - see paragraph 18 of TR 2000/2 Income tax: deductibility of interest on moneys drawn down under line of credit facilities and redraw facilities"

    "18. A taxpayer may choose to refinance a debt outstanding on a mixed purpose sub-account by borrowing an equivalent amount under two separate accounts or sub-accounts. If the sums borrowed under those two separate accounts are equivalent to the respective income producing and non-income producing parts of the existing outstanding debt, we accept that interest accrued on the debt incurred in refinancing the income producing portion of the mixed purpose debt will be deductible."

    http://law.ato.gov.au/atolaw/view.htm?docid=TXR/TR20002/NAT/ATO/00001


    Example.
    John redraws from his home loan to get $100,000 deposit which he used for his investment property purchase. $400,000 loan became a $500,000 loan and it is now mixed.

    John needs to refinance the loan so it is split into 2:
    • Loan A being $400,000 and
    • Loan B being $100,000
    John should do this asap because any deposits into the big loan will come off both portions of the loan and he will be paying down investment debt and further mixing the loans.
     
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  2. Terry_w

    Terry_w Structuring Lawyer and Finance Broker - all states Business Member

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  3. drg86

    drg86 Well-Known Member

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    I have a question in relation to this. At this point I don't think anything is mixed (as have not used the funds) but to avoid it would like your opinion.

    Scenario:
    PPOR loan $185,000 on $245,000 purchase price. Lives in 12 months.
    Decides to move into partners PPOR converting her place to an IP.
    Gets valuation done as changing to IP. New value $270,000
    Has gained 25k equity and bank refinances on new valuation. Loan goes from $185,000 to $210,000. NO split.
    Extra equity funds of $25,000 deposited into separate offset account. (multiple offsets allowable with this lender)
    Intention was to use the $25,000 for further renovations to same property. All loan funds would have been for the same property/purpose.

    Fast forward to now and she wish's to use the funds for a new PPOR build with partner.

    If she uses the $25,000 towards the new PPOR it becomes mixed purpose as part IP part PPOR as there was no split.

    How does she use the $25,000 without mixing?
    1. Repay the $25,000 off the loan and re-borrow with a split?
    2. Repay to the loan and just redraw?

    Thanks
     
  4. Terry_w

    Terry_w Structuring Lawyer and Finance Broker - all states Business Member

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    Refinance and split the loan.

    If you repay the $25k you will worsen the problem and reduce both portions and lose tax deductions as well.
     
  5. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Member

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    To determine a relevant proportion I have a simple excel tool. It is limited to TWO uses and beyond that may require support. Examples are already in it.

    The excel template also allows a deliberate mixed loan to remain mixed while it calculates the deductible percentage for each use and also addresses further redraws. This method comes with greater risk of course.
     

    Attached Files:

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  6. USC

    USC Active Member

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    Very helpful posts thanks and the ATO link was great too. I am planning how to un-mix a loan that has funded 3 IP deposits and share purchases, secured by our PPOR which we are going to sell. Hindsight...

    eg.
    - before selling our PPOR, I want to un-mix the loan so I can retain interest deductions for the IPs (rather than have the loan paid off from PPOR sale proceeds)
    - 100k (nominal amount) loan: originally 30k for each IP and 10k for shares.
    - Shares sold years ago, so deductible interest has been 90k for a while, split 3/10 of total interest for each IP.
    - Plan is to increase each IP's own big loan by 30k, thereby consolidating deposit into it.
    - So theoretically I can pay the 3 x 30k from each IP equity release into the 100k loan and maintain deductibility. That will leave me with a 100k loan - 90k in redraw and the remaining 10k non deductible debt (prev shares).

    1. The sum of the new borrowings is not equivalent to the outstanding debt - is this a problem? Do you think I need to also borrow 10k somewhere to satisfy paragraph 18?
    2. Would everything need to occur simultaneously, or can I do it over a few months?

    I'm not sure if I'm over complicating things!
     
  7. Terry_w

    Terry_w Structuring Lawyer and Finance Broker - all states Business Member

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    You should seek specific tax advice usc
     
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  8. USC

    USC Active Member

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    No worries Terry. Definitely on the agenda with my next catch up with accountant. Appreciate the tips, allows me to make somewhat informed decisions...
     
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  9. Noodlesm

    Noodlesm Member

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    Hi Terry,
    What if the Money redraws from IP is for share purchase. It would still be considered for investment purchase hence deductible?
    Thanks!
     
  10. Terry_w

    Terry_w Structuring Lawyer and Finance Broker - all states Business Member

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  11. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Member

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    It os still a blended loan. So you buy another prcel sell buy again. How much is deductible vs shares and how much vs ip...you would have no idea i suspect.
     
  12. Noodlesm

    Noodlesm Member

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    Good point! Hold it for long term like the most planner would say.
     
  13. Terry_w

    Terry_w Structuring Lawyer and Finance Broker - all states Business Member

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    You should split the loan first, or redraw and refinance later to split.
     
  14. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Member

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    Some of the benefits of margin lending broker accounts include :
    - They only approve shares that produce income (ie deductible acquisitions)
    - The account is tied to shares purchased and sold so always remains a deductible loan balance
    - No apportioning or other issues
    - Generally low cost trading fees
    - Can usually be combined with personal borrowed $ (ie from LOC)
    - Integrated reporting makes year end a very simple process. No calculations !!
     
  15. chylld

    chylld Well-Known Member

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    Split all the loans!!! :D

    [​IMG]
     
  16. Gypsyblood

    Gypsyblood Well-Known Member

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    Just been reading different responses on using redraw vs. creating a new loan.. and if you can advise on below it would be greatly appreciated @Terry_w @[email protected]

    I have a PPOR with equity but my online bank has a long painful process to get a new loan against the equity. So i am looking to do what seems simpler to me.
    I have about 55K in cash at the moment (on top of a cash buffer for my investments so i am okay to use this 55K). Can I:
    • Put this 55K in as cash into my PPOR loan. Will have a redraw available of 60K at that point (5K redraw already there)
    • Draw out money from this redraw facility as and when I am paying down initial costs of the IP i.e. 1K as holding deposit on initial contract signing then another 1K for building and pest inspections etc. bit by bit all the way down to when the settlement happens and the full 60K would have been redrawn at this point. The whole redraw will only be against 1 IP and will not be used for any other purpose.
    • I dont know if this is relevant but the mortgage payments are Principle and interest and fortnightly hence a redraw buffer starts building up right away out of these mortgage repayments

    Questions:
    1. Will this redraw be tax deductible against the IP?
    2. What issues do you see?
    3. What are the impacts if at some point in the future (5-10 years) this PPOR is to be made into an IP?
    4. What is the better way to structure this in your opinion?
    The other option is: Get a 60K loan against PPOR equity. Use that loan for IP deposit and costs. For my peace of mind, I am keen to pay down this loan asap with the 55K cash i have and close it within a month or 2 max of having used this loan. Any other ways you would recommend are better?
     
  17. Terry_w

    Terry_w Structuring Lawyer and Finance Broker - all states Business Member

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    1. Yes, but apportionment needed

    2. Extreme mixing

    3. The part of the loan related to the purchase or improvement of the PPOR may be deductible at that point

    4. Split the loan before paying anything in it. Convert this new split to IO. Once done that then pay $55k into it and redraw it – borrow – to invest.
     
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  18. chylld

    chylld Well-Known Member

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    Very relevant. The principle portion of each repayment will come proportionally off each loan portion. As Terry says, extreme mixing
     
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