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

If someone had a mixed loan with $200,000 of it used for investments and $300,000 of it use for OO purchase they could refinance it into 5 x $100,000 loans and claim the interest on 2 of them.

 

Just need to ensure it is continually and always the same 2 loans.

 

Thank you, clear now.

Yes I think so, i had the single mixed loan of 300k which was split into 275k and 25k investment and personal portions respectively.

The way they did this was paid 275k into the original 300k loan and created a new 275k split. - so I've taken the original 300k loan which has now became the 25k to be for personal use and have been claiming 100% of interest on the new 275k split.

To further complicate things, I refinanced to another bank and have merged this 25k loan with another non deductible loan that I had with CBA.

I guess it comes down to whether ATO accept the paying down method of splitting loan purposes as a reasonable method. If not, I've made a bit of a mess.

 

The ATO will require the taxpayer demonsrate their treatmnet is reasonable. They will generally seek a complete history of the affceted loans going back to day dot. Then look at all changes eg new amounts drawn down and proof iof use. And then each subsequent refinance. If the taxpayer can demnstarte and satisfy the ATO the deductible % is OK then there is no issue. But if they cant satisfy the ATO or prove the deductible use of EVERY drawdown or use of the funds its then a concern. In the easiest sense if the taxpayer doesnt have the full and complete history its a problem.

 

Thanks Paul, I this I have ensured I've kept, statements and apportionment calculations etc.

Was also thinking if they still deem a paid down mixed loan (for purpose of splitting) as still being mixed, then the new split loan would also have to be considered mixed - but this would result in the same amount of interest being claimed anyway, and seems like it would be an unnecessarily inconvenient and complicated way to view it.

 

The ATO dont "deem". They consider facts.

 

For an investment property that was financed with 20% deposit and purchase costs by (redrawing from private use loan) mixing a loan into roughly 60/40 investment/private portions and financing the other 80% as a separate investment loan.. Is it possible to refinance investment property for the value of original investment loan amount + (60%) investment share from mixed loan?
Or, do you have to refinance mixed loan into two first, and then “combining” two investment loans (whatever combining means)?

 

If the loan is mixed you cannot pay into that loan without mixing it further - the loan can be refinanced and split though.

 

What if I split my $500k PPOR loan into 2 portions, Loan A $100k for debt recycling and Loan B $400k for personal purpose. I was then not able to pay the full $100k into Loan A in one go, but paid $20k into it each month and then redrawn immediately to buy shares. I have deposited and redrawn $80k since. It seems like I have mixed Loan A. Can I use the calculation in TA provided to calculate the business/personal split in Loan A? And I should not deposit anymore money in Loan A or should I put another $20k to make it a full $100k?

 

You will have a problem because of extra mixing with each redraw

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

 

Thanks Terry.

 

I am not very good at explaining this scenario. Let me try again.
Loan A = 300k = mixed loan with 60% investment (180k) and 40% private (120k).
Loan B = 500k = solely investment loan.

Can I refinance investment property as new loan C which would be equivalent to 680k. This money would pay down 60% of debt in loan A and full debt in loan B.
This way, leftover 40% of loan A is solely private loan and loan C is solely investment loan.

Or how would you approach this?

 

No you can't because if you borrowed and paid down into Loan A it would be reducing both components of that mixed loan. You would be paying off both portions.

You would need to refinance Loan A and split it into the 2 portions and then can join the $180k loan with the $500k loan.

but from your other post just now you may have further issues.

 

This is gold! Very helpful.
What would happen if you have a 60/40 investment/private mixed loan. You then put 10k into loan/redraw account (as an extra repayment) and then at a later date put another 20k (again as an extra repayment) into offset account. Assuming 60/40 split is still maintained, is there any harm or change in percentages if 10k from loan/redraw account is transferred into offset account (at which point there is 30k in offset account).
That 30k is still sitting in offset account and has not been moved anywhere.

 

Ok, that makes sense. Thank you. Wish I came across all these earlier.

 

If hte loan was mixed 60/40 then every time you deposited money it would come off both portions of the loan, there is no way to make a deposit come off the non-deductible portion unless the loan is split first.. $10,000 deposited will reduce the non-deductible portion by $6,000 but also the deductible portion by $4,000 (assume 60% of the loan relates to non-deducitble debt.)

This is why it is so important to not mix.

 

A 40% borrowing will always remain 40% of the loan balance unless new amounts are drawn. Each time that occurs recalculate each %. All interest, fees and repaymnets will be % based and cant be allocated to one of the other use.

One or more of the uses will dilute. And thats why blended loans pose a problem. The % can eroded.

 

I need to see an accountant to determine the proportions for my mixed loan before turning PPOR into IP. Other option is to sell if numbers don't stack up.

I'm not sure if this is a ridiculous quesiton or not and I know it would only be an very rough estimate, but does anyone have any idea as to what proportion of the following loan would be tax deductible, if any?

- Original mortgage $550k
- Currently $250k available in redraw with $215k owing
- Lets say for 5.5 years we have deposited about $5k and redrawn about $2k each month.
- Not sure that it matters, but we also switched banks after 5 years (6 months ago), but continued as above.

Thanks.

 

You would need to calculate what the blended mix % was back 5.5 years ago. Thereafter assuming no new borrowings the same % applies to interest and also reductions of principal to each element. So the % remains the same and the calc may be simple. The refinance would also need to be reviewed in the event something adverse occurred which affects the % mix. ie a new loan. Then it could now be three elements for example.

1. Original deductible, 2. Original non-ded and then 3. New element

Once all calcs are done retain copies of all original loans statemnet and calcs. Its one of those forever things to keep

 

It would be difficult to work out and you would need a spread sheet and going back and looking at every deposit and withdrawal

that doesn't really change anything