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

Thanks Terry - will do

 

Hi again @Terry_w - just to be clear, did the loan become mixed when I redrew the $40k to put in the offset or when the joint everyday savings account became the offset?

 

When you redrew

 

Hi @Terry_w

I have listed a couple scenarios below and would like to receive your thoughts on them:

Scenario 1:

Variable I/O Loan A at 100,000 is refinanced as Var IO Loan with an offset account.
Var I/O equity Loan B of $50,000 with offset account is to be set up as LOC - seperate new loan

The lender error at settlement time - Bank deposits $50,000 to Offset account linked to refinance loan $100k Loan A, thereby reducing the applicable interest deductions & this also means that interest is payable of $50,000 Loan B as its offset account has $0 balance. Thus interest is calculated on both loans post settlement onwards.

Do you see any impacts if the bank was able to resolve this by linking the correct offset account to loans and make interest adjustments. Or any alternative manner that you would approach this to keep it clean.

Scenario 2:

New Var IO equity loan split at $50,000 with offset account is requested.

At settlement, bank makes an error again. Instead of depositing $50,000 to its linked offset account, it transfers the proceeds into my personal/savings account.

Since the offset account linked to the $50k loan has $0 balance, would transferring $50k from savings account (where the loan proceeds were deposited) to the linked offset account be ok to do? Or that is looked at mixed funds due to loans proceeds being mixed with personal.

Would interest deduction be at risk once $50k is used to invest in income producing assets.what steps are required in order to keep it clean.

Thank you in advance.

 

Does the name of this lender begin with N?

You should probably just deposit the $50k back into the LOC or loan and starting again.

Best to get your own tax advice though.

 

Lender name starts with C. Thanks Terry.

 

from what I have seen most of the banks make mistakes from time to time. Mainly putting funds in the wrong account. I had one which wouldn't settle because the form indicating where to put the money was wrong. Gave them the form, then they ignored it completely

 

Thank you, Rolf.

 

Hi @Terry_w

Checking through the posts i cant find a situation that is the same as mine.

I recently refinanced my Investment Property and made the mistake of getting cash out to put towards another investment property. Refinanced from $185000 to $255000, so got $70000 cash out which was put into my wife's savings account (I know silly mistake here). It has now sat in an interest earning account for 4 months while i have been paying Principal and Interest on the full loan amount.

I since decided not to by another Investment property due to COVID reasons and realised my mistake and now need to Unmix/Fix this loan problem. Is this a simple process or have i seriously contaminated my loan.

I am perfectly happy just getting back to the original amount owing of $185000 (minus the 4 months repayments)

Any help much appreciated

 

its a mixed loans so you have to work out the percentage of the interest relating to those extra funds parked.
Then you have to split the loan into the 2 portions
Then y ou can pay off the non-deductible split.

if you just stick the money back into the loan it won't work and will make things worse.

 

Hi @Terry_w,

Can two loans be unmixed in this regard? I have two splits used for investment that have unfortunately had accidental personal withdrawals for bills. I'm wanting to fix this up when I refinance soon so I no longer have to apportion interest. Can I just condense this to two accounts, say the main home loan account + 1 split which is the sum of the investment amount across the current two splits?

Thanks

 

This is exactly what the thread is about. One mixed loan can be refinanced and unmixed into 2 or more loans. I would suggest you do this and then consider joining the splits that related to the same use.

 

Forgive my ignorance, but if you only paid off the non-deductible split, would that not start to sound like a "scheme"?

 

Yes but it's not up to the ATO to tell you where to pay your money first

 

I’m thinking about Hart’s case. Or is it more akin to debt recycling?

 

This is not related to the Hart case scheme which involved capitalising interest. You are not increasing tax deductions artificially by splitting a loan

 

So in a typical loan split on a P&I loan, am I correct in saying that your repayment pays the interest owing on all splits and the principal part of the repayment goes to the non-deductible split by choice?

 

each split is a separate loan with minimum repayments. It is up to the borrower where they direct their extra repayments and/or link their offset account.

 

However, a unsplit loan (eg blended loan) requires that the repayments are apportioned across each purpose. You cant choose and allocate to one purpose as its a single loan account.

eg Fred has a Blended loan of 100K. $50k was used to buy a boat. $50K was used to buy ETFs. Fred runs the boat into a reef in Sydney Harbour and it sinks. The insurer pays him $50K. He pays this to the loan. Fred then has a tax problem.

He has actually repaid $25K of the boat loan and $25K of the ETF loan. So of the remaining $50 debt only $25K (50%) is deductible. If only he had sought Terrys support and advice as a broker knowedeable on these things. Terry may have sought a split of the $100K loan BEFORE Fred repaid $50K and then Fred may have applied the $50K only to the boat loan. But when its blended loans are always a problem. You cant choose which portion it applies to no matter how obvious. And nobody thinks of this until its too late. Then it CANNOT be fixed. eg Freds issue is fatal to his deductions. There is no fix.

Tip : You can blend a loan on draw downs, if the offset it tainted and also on repayments. This is why they are a concern. The problem doesnt go away unless the blending is unwound.