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

Discussion in 'Accounting & Tax' started by Terry_w, 12th Oct, 2015.

  1. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    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
     
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  2. cherubym

    cherubym Well-Known Member

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    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.
     
  3. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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  4. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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

    teetotal Well-Known Member

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    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,
     
  6. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    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.
     
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  7. melbournian

    melbournian Well-Known Member

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    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.
     
  8. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    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.
     
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  9. househuntn

    househuntn Well-Known Member

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    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
     
  10. larrylarry

    larrylarry Well-Known Member

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    You paid for land with credit card!??!!!
     
  11. Hanso

    Hanso Member

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    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?
     
  12. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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

    Terry_w Solicitor, Finance Broker, CTA Business Member

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

    melbournian Well-Known Member

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    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.
     
  15. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    Merchant fee ?
     
  16. pinewood

    pinewood Well-Known Member

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    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?
     
  17. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Depends if you borrowed it and back evidence the agreement.
     
  18. pinewood

    pinewood Well-Known Member

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    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.
     
  19. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    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.
     
  20. M-THIS

    M-THIS Active Member

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