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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 Solicitor, Finance Broker, CTA 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 Solicitor, Finance Broker, CTA 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 Solicitor, Finance Broker, CTA 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

    Paul@PFI 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 Solicitor, Finance Broker, CTA 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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