Tax Tip 45: How to work out the Portions of a Mixed Loan

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

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  1. Terry_w

    Terry_w Structuring Lawyer and Finance Broker - all states Business Member

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    You cannot unmix a mixed loan until you know what the relevant portions are.

    This is simple if the loan is IO and there have been no repayments, but it is very complex if the loan is PI and/or there have been multiple repayments over a long time. Even working it out for a few months is complex.

    From paragraph 19 and 20 of TR 2000/2 http://law.ato.gov.au/atolaw/view.htm?docid=TXR/TR20002/NAT/ATO/00001


    The formula to work out the deductible percentage figure is:

    [ (A + B) / C + D) ] x 100

    A = opening balance (beginning of month) of outstanding principal used for income producing purposes;
    B = closing balance (end of month) of outstanding principal used for income producing purposes;
    C = opening balance of total outstanding principal;
    D = closing balance of total outstanding principal;
    Note: the closing balance for one month is the opening balance for the next month.

    This figure is then multiplied by the total interest accrued for the month.

    Deductible interest = total interest accrued for the month x ( [ (A + B) / C + D) ] x 100)

    Now that is totally clear let’s look at an example, it would be too hard to reproduce here but look at the ATO's example 1 at paragraph 53 of TR 2000/2
    http://law.ato.gov.au/atolaw/view.htm?docid=TXR/TR20002/NAT/ATO/00001
     
  2. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Member

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    But as I regularly caution clients the more you blend the more complex it gets. The formula is ok for simple cases
     
  3. Terry_w

    Terry_w Structuring Lawyer and Finance Broker - all states Business Member

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    Even for the simple cases it is pretty complex!
     
  4. D.T.

    D.T. Specialist Property Manager Business Member

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    It's simpler for io loans than p&I ones I imagine
     
  5. Terry_w

    Terry_w Structuring Lawyer and Finance Broker - all states Business Member

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    Very simple as long as no payments have been made into the loan.
     
  6. twau76

    twau76 Member

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    For a mixed loan, after certain point of time, there is no payments made into the loan(start using offset account), all the redraw after this point should be deductible, right?

    can the deductible percentage formula above be applied to the redraws before using offset(mix usage of redraw and payments )?

    what happens if I transfer the fund from a new split into the mixed loan, it will be a big mess then? any way to mitigate this? Thanks.
     
  7. Terry_w

    Terry_w Structuring Lawyer and Finance Broker - all states Business Member

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    Not sure I follow.

    If you have a mixed loan and use redraw on this loan you will be mixing a mixed loan further.

    If you move funds from one new split to an existing loan this will be a refinance. If you have a mixed loan you can only split it and unmix it by paying it out in full at the one time. There is an except which I will write about in the next tax tip.
     
  8. twau76

    twau76 Member

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    Thanks Terry.
    The loan initially is used like a transaction account. Putting salary in, transfer out for expense or investment whenever required. Then one day offset is set up, and no payment any more into the loan account, only do some redraws.
    So the investment redraw after the offset account setup could be fixed by setting up new splits , but the redraw before the offset account setup should calculate the portion, as some extra repayment happened, and it has been partly paid off. Is my understanding correct here?

    I am not sure I get the point of moving fund from a split to another is a refiance.
    For example , there are 2 splits, 400k and 100k. And moved 100k into 400k split.
    So the 400k split will be 500k , 100k will have no deductibility any more, and should be recycled?
     
  9. Terry_w

    Terry_w Structuring Lawyer and Finance Broker - all states Business Member

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    the loan would be forever tainted before moving money into the offset and then tainted even more.


    If you segregate the investment redraw you will be able to claim all the interest on this portion (assuming you do it correctly). If you don't split it you will need to calculate the relevant portions on the whole loan amount, which will reduce the amount of interest you can claim on your new investment redraw.

    If you have one loan with a $100k and a $400k portion then you can claim 20% of the interest on the $100k portion's use and 80% on the use of the $400k. Assuming these are the only transactions.

    But it sounds like you started with $400k and put money in and out and then increased it to $500k. If so you wont be able to claim 80% of the loan interest against the use of the $400k because all of this portion won't relate to the purchase of the property. But if $100k redraw is new and there have been no deposits you should be able to claim 20% of the interest in relation to this.

    Any further deposits will contaminate both the $100k and the $400k loans. That is why you should probably split sooner rather than later, especially if the $400k relates to the undeductible main residence loan.
     
  10. twau76

    twau76 Member

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    Thanks Terry, appreciate your great help.
    Luckily no more deposit later on. So Better to recycle 100k split in the future, then I can claim 99.9% instead 20%?
     
  11. Terry_w

    Terry_w Structuring Lawyer and Finance Broker - all states Business Member

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    I think you misunderstand the 20% - that is in relation to the whole loan.
     
  12. mr_alex

    mr_alex Member

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    I am in this boat. I bought a ppor in 2013, moved out at the start of last year and it has been rented out for a year now, during the time I was living there I made regular extra payments and a couple of personal redraws. those calculations are beyond me. Would I be best going to a tax accountant first and get them to workout the portions and then seek a mortgage broker to have them split the loan into 2. Thanks for any advice.
     
  13. Terry_w

    Terry_w Structuring Lawyer and Finance Broker - all states Business Member

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    Bantacs have an excel spreadsheet for sale for working this out. Only about $40. If you were to see someone like me it would cost you $660
     
  14. Otie

    Otie Well-Known Member

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    Ok I have a topup settling shortly.

    All of topup funds will be used for new IP purchase deposit except 15k.
    15k will be used for improvements to my PPOR.

    I’ve just been informed that becuase they can only give me 4 splits (I already had 4) they will be increasing the loan of one of my splits (this loan is currently a PPOR split)
    So I imagine this will become a mixed use loan?
    28k of the funds are personal that was already drawn down, but the new amount that will be used for IP deposit will just be added to this.

    Not really sure what to do about this or if I will just keep good records?
     
  15. Terry_w

    Terry_w Structuring Lawyer and Finance Broker - all states Business Member

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    change banks if you have to.

    Why do you need 4 splits?
     
  16. mr_alex

    mr_alex Member

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    Thanks Terry, I found their loan apportionment spreadsheet, took me a good 4 or so hrs to enter all my bank statement data over the years. Works out I can claim 90% of all future interest charges, given no more redraws.
     
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  17. Terry_w

    Terry_w Structuring Lawyer and Finance Broker - all states Business Member

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    It would have been a good way for it to all sink in too.
     
  18. mr_alex

    mr_alex Member

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    1. The calculator does not specify if it is designed for IO or PI loans, does it matter?
    2. Can I now go to the bank to split it into the non deductible/deductible portions that the calc gave me.
    Thank you for your great information Terry.
     
  19. Terry_w

    Terry_w Structuring Lawyer and Finance Broker - all states Business Member

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    Seek advice from your tax agent or tax lawyer. I have never seen the calculator so cannot comment.
     
  20. MikeLivingTheDream

    MikeLivingTheDream BCOM MCOM MTAX CPA CTA Registered Tax Agent Business Member

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    Call julia and ask
     
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