Tax Tip 53: Paid Deposit with cash - how to fix big mistake before settlement

Never pay for a deposit on an investment property with cash if you can avoid it, and you can avoid it in most cases. But what happens in you have a momentary lapse of common sense and do pay the 10% deposit with cash only to realise a few days later it was a mistake


A few possible options

1. Cancel the cheque - if you are quick enough. And then use the borrowed money, even from redraw if need be (not ideal but this can be fixed up later);
   
   
2. Ask the agent to refund your deposit and then repay using borrowed money. The agent will be holding your deposit on trust until settlement so it hasn’t been paid to the vendor yet. But they are obliged not to release it until the Vendor directs.
   
   
3. Draw a bank cheque for the deposit amount and hand this to the agent on the condition they release the deposit back to you.
   
   
4. Pay the deposit twice. The second time with borrowed money. Upon settlement any excess should be released back to you - make sure it doesn’t get used at settlement. This is not ideal however as the borrowed money will be mixed with cash while it is with the agent and upon return you cannot really say that you got back the non borrowed money.

Before doing any of these seek legal advice as there are many legal complications.

Also seek tax advice, including general advice on the deductibility of interest and advice on whether the ATO could deny the deduction under Part IVA.


ps - why is it such an issue? On a $1mil property 10% = $100,000. If you paid this with cash that is approx $5,000 (at 5% interest rate) per year less in tax deductions for the period you hold the property. A lot of money.

Key words: Deductibility of interest; loan structuring

 

What if someone is already made this big mistake and settled? I assume this will become a big mistake that can't be corrected, even with the loan apportionment. He/she will be losing deductible tax every single day.

 

Yep - once paid for you cannot reimburse yourself.
Tax Tip 5: Reimbursing yourself - Impossible
https://propertychat.com.au/community/threads/tax-tip-5-reimbursing-yourself-impossible.1737/

 

I once had a sole trader who tried to argue that he was paying himself a wage and losing money. Its just as logical.

 

Hi @Terry_w -
I have paid cash deposit for an OTP IP and i currently don't have any existing property.
I assume the above only applies if you have an existing property to borrow more money, right ?

What if you don't have any existing property and need to put deposit down for an OTP investment property. Is it possible to do as you suggest ?

Cheers,

 

You could apply the above in many instances if you don't have other property. e.g. if you were borrowing from parents or using parent's property as security etc.

 

Deposit bond I think is best if using large amounts but if it is for like 375k purchase and only 30 day settlement which is really only 37.5k would it make a significant difference?

With Land purchases I use credit card 0% interest free purchases for 1 year and u get points too.

 

It could be.

Consider a timing issue where the LOC which will be used as deposit has not been set up yet. Using a deposit bond could mean no deposit is paid until settlement.

$37k could then be borrowed instead of paid with cash.

At 5% interest that means approx $1875 in extra tax deductions each year for the next 30 years or so.

 

I'm planning to buy my first investment property on my own, so it looks like cash is my only option...? I don't own any big assets at the moment, just a depreciating car

 

You paid for land with credit card!??!!!

 

Terry can you still claim the interest as a deductible if a new equity loan was taken out on a PPOR, and that equity amount was deposited in to the offset against the original loan. Then an IP deposit was paid from the offset?

 

That is not your only option, see:
Tax Tip 61: How to borrow 105% on your first purchase

 

Depends. See
Tax Tip 1: Parking borrowed money in an offset account

 

major developers at that time in pt cook allow for this but obviously not straight off a single vendor. Well they sell these to foreigners all the time and many pay with cards.

 

Merchant fee ?

 

Same, I didn't know about this tip either and paid deposit with cash but it's actually from my spouse's account. Can I do anything here to claim deductibility and how do I go about it?

 

Depends if you borrowed it and back evidence the agreement.

 

Thanks Terry, well that's what I thought of doing. Is it just a matter of putting it on paper and signing some agreement when interest is paid for x years.

 

Ideally you would want to have a commercial loan agreement on arms length terms done in writing before the money was transferred. if you have already lent money you should put the oral agreement in writing asap.

 

Is this NOT APPLICABLE if purchasing a property for via a trust - and the cash is coming for the individual?