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

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

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  1. Brizza

    Brizza Active Member

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    Thanks for your replies. If unbending a mixed loan into a split loan, are the associated refinancing loan fees also proportioned into the new loan split amounts or should these fees be treated separately altogether? I'm thinking about paragraph 18 in TR 2000/02
     
  2. Terry_w

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

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    yes
    but refinancing loan fees would be minimal these days.
     
  3. Brizza

    Brizza Active Member

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    Thank you. You mean yes, as in yes, you would proportion the refinancing loan fees into deductible and non-deductible splits as calculated?
     
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  4. Paul@PAS

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

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    If its a refinance . However if the refinance relates to a new equity amount for a specific purpose then the efforts may relate to that purpose and be solely for this new purpose.
     
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  5. Brizza

    Brizza Active Member

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    Ok so say you refinanced to invest in shares (which is an income producing endeavour), even if in the process you unmixed a loan by splitting, the entirety of the refinancing fees would be tax deductible because you are refinancing for the purpose of investing in shares?
     
  6. Terry_w

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

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    You don't refinance to do something. A refinance is paying one loan with another.
     
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  7. Brizza

    Brizza Active Member

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    True. Ok, so say the purpose of the new loan is to buy shares, could you claim the cost of obtaining the new loan (essentially refinancing fees) as a tax deduction if the old loan was a mixed use loan?
     
  8. Terry_w

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

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    This thread is about unmixing loans.
    If you borrow to buy income producing shares an expense that relates to this could be deductible, in full or in part or over time depending on the circumstances.

    If you redraw from an existing loan you will have a mixed loan hadn't been paid down to zero before redrawing.
     
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  9. Villa7

    Villa7 New Member

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    May I ask if TR2000/2 and the principles contained therein apply to mixed home loans as well, or just lines of credit and redraw facilities (p.s. I am not sure if the distinction makes a difference)?
     
  10. Terry_w

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

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    it apples to redrawing from any loan
     
  11. mr_alex

    mr_alex Well-Known Member

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    Hi Terry, I have a couple of questions, I am about to request a loan split and ensure I get it right.

    1) in the above example, could John refinance the loan like this:
    Loan A $300,000
    Loan B $100,000
    Loan C $100,000

    And John would just nominate which 100k account would be for the investment and which would be an additional personal split.

    2) if I am looking to split but not refinance, would there still need to be 2 new accounts and the original loan account closed? I have split in the past with CBA and I was left with the original loan intact, but balance adjusted and one new loan account for the split portion

    3) I am with AMP now, is there anything I should request from them and how they process this in order so it is done correctly?

    Thanks Terry
     
  12. Terry_w

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

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    If John is splitting a mixed loan by refinancing it into the relevant splits it won't change the deductibility - initially. If 2 smaller loans relate to one use then there is no tax difference to having one bigger loan.

    If you are not refinancing one loan into 2 (or more) then this is something the ATO has not given the green light to. Sounds like you might have mucked things up with CBA

    3 - I can't advise you on this.
     
  13. Paul@PAS

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

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    Warning. Many lenders will split loans and do all the right things. Then combine saved money in a offset with the new funds. That is then blended before its used to buy the shares o_O

    So when the proceeds are paid to buy shares only a % of that is deductible. And its hard to blame the lender since the borrower usually authorises it. Or "thats what they do". In which case the new proceeds should sit in a clean account to avoid the problem.
     
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  14. Paul@PAS

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

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    I regularly have people who confuse what a "split" is. Here is a recent one. It involved me arguing with the broker who insisted I was wrong. I told client I wouldnt speak to his broker. I gave him the advice the broker had it wrong.

    Fred had a facility for $300K. He has paid this down to $200K. He then had a new split for equity out for a new property. The bank left him with a old loan of $300K and a new balance of $50K. He has equity out of $150K. Its still blended and may even be worse than it was. The lender should have created two loans. One for the residual of $200K for the old purpose and a new loan from $150K for the new purpose. This all occurred on the day of the advance and fortunately it was fixed.
     
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  15. mr_alex

    mr_alex Well-Known Member

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    Bugger.
    To go off your liquid examples, if I have a cup with equal parts green and blue dye, there is obviously no physical way to unmix this now but the ATO allow you to notionally unmix it by pouring the entire contents in equal amounts into 2 new cups. - Surely pouring half into 1 new cup and reusing that existing cup for the other notional portion is the same thing, the only difference is there wouldn't be a perfectly good cup wasted.
    Seems obvious what the intention behind it is, but understand there is no specific direction from them.

    I feel like this would be a very common occurrence when splitting if you arn't refinancing to a new bank, unless you ask specifically for the original loan to be closed and be given 2 new accounts. - will request this though and see how I go. Thanks for your help Terry, I continually learn new things here.
     
  16. Terry_w

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

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    refinancing doesn't mean changing banks. All it means is paying one loan out with another - which usually involves changing banks.
     
  17. mr_alex

    mr_alex Well-Known Member

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    Sorry are you able to explain this further Terry,

    If John had the mixed loan of 500k (400k personal, 100k investment)

    If he wanted to split the investment portion off, but also create a couple other splits from the personal at the same time,

    Instead of just splitting into a 400k, and 100k
    He could instead split into 5x 100k splits and just allocate one of them as being the investment/deductible split and the rest would be personal. - am I understanding that correct?


    Thanks Terry, what I'm getting is the refi is to ensure the whole of original loan is paid down and 2 (or more) new loans are created.
     
  18. Paul@PAS

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

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    Yes. However which ? The other advantage of te split means you can focus on reducing the non-deductble ahead of the deductible.

    A "refinance" is a discharge of one exact amount for another loan of the same. Its unnecessary to split the non-deductible $400K into 4 accounts of $100K each. Unless it was a loan that could later become deductible.
     
  19. mr_alex

    mr_alex Well-Known Member

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    If all splits are equal and match what the investment portion previously was, I don't see why you couldn't just pick one? I suppose would be easier for them to be different amounts to distinguish.

    Yes I was thinking if John wanted to set himself up for debt recycling in the future, so he would have 4 personal loans pre split ready to go.
     
  20. Paul@PAS

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

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    Splits are best considered at that time. eg It could be $130K not 2 x $100K etc. The amount at that time is what is borrowed not what is hoped or planned.