Tax Tip 55: An Exception to the rule about splitting before Repaying a Mixed Loan

Discussion in 'Accounting & Tax' started by Terry_w, 13th Oct, 2015.

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  1. Terry_w

    Terry_w Structuring Lawyer and Finance Broker - all states Business Member

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    The ATO generously allow a concession to repaying a mixed loan where one part of the loan was used to acquire an asset and that asset is later sold. The proceeds from the sale of that asset can be paid straight into the loan with the money coming solely off the portion of that loan relating to the purchase of that asset.

    Best explained with an example:
    John borrows $100,000 from redraw on an existing $400,000 loan balance making it a $500,000 owing. He uses the $100,000 to acquire an investment property. The $400,000 related to the acquisition of his main residence and he has a mixed loan problem.

    Any deposit of money into the loan will come off both the $400,000 portion and the $100,000 portion. If John doesn’t split the loan but paid in $100,000 as an extra deposit this would come 20% off the $100,000 split and 80% off the $400,000 split. This is because of the ratios of each portion in relation to the whole $100,000 / $500,000 = 20% etc. To fix this John must split the loan before repaying any money into it.

    So what happens if John sells the investment property and pays down the loan, or worse sells his residence. Could he pay $400,000 from the loan and just leave the $100,000 available? I would have thought he would have had to split the loan first. But the ATO says otherwise.

    If John sold the investment property and deposited $100,000 into the loan the ATO will accept that the remaining loan all relates to the purchase of the main residence.


    In paragraph 45 of TR 2000/2:


    Then scrolling down is:

    Note in this example how there was an extra $1000 paid into the loan and this $1000 come off both portions of the loan. Make sure you don’t pay extra into the loan, but just the original borrowed funds. Any extra should be paid later when the loan is split - or not paid at all.

    http://law.ato.gov.au/atolaw/view.htm?docid=TXR/TR20002/NAT/ATO/00001
     
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  2. Terry_w

    Terry_w Structuring Lawyer and Finance Broker - all states Business Member

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    I think I can explain it better with another example, same example as in Tax Tip 54: Why Not to Mix Loan Purposes https://propertychat.com.au/community/threads/tax-tip-54-why-not-to-mix-loan-purposes.4728/

    In this example if you sold one investment property for $200,000 and paid $100,000 straight into the $500,000 loan then the ATO will accept that this $100,000 came off the loan that was used to acquire the property. i.e. the $100,000 will not be taken to have come off each of the 5 loans.

    But as only $100,000 relates to the money borrowed to acquire that property if you paid $140,000 into the loan then $100,000 will come off the loan for that investment property and the other $40,000 will come off each of the remaining 4 loans, reducing their balances by $10k each.

    So don't pay off more than the money borrowed for that asset unless you split it first.
     
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  3. DanW

    DanW Well-Known Member

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    Thanks Terry!

    This is great news for alot of people since we can't always keep loans separate due to finance product limitations.
     
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  4. S0805

    S0805 Well-Known Member

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    Para 37 from this

    Where the funds borrowed under a line of credit remain outstanding, we believe the deductibility of interest is to be determined by considering the ongoing application of those borrowed funds. Interest is considered to be the cost of retaining the use of the outstanding line of credit funds in the period in which that interest accrues. Where borrowed funds are recouped from the sale of an income producing asset purchased with that money, the connection between the interest expense and the income producing use of that asset will be broken when the asset is sold. Interest on those borrowed funds will only be deductible after that time if it can be established that the accrued interest continues to be incurred in the course of deriving assessable income or in carrying on a business. For this to be the case under a line of credit, there would need to be a sufficient connection between the accrual of interest in a period and any new application for income producing purposes of those recouped borrowed funds. Deductibility of interest on those borrowed funds will be determined by a consideration of the advantages sought from that new use to which those funds are redirected.

    So does that mean they will accept that even if one doesn't pay off the borrowed amount (or part of the amount) and re-invest them in income producing purposes it maintains the tax deductibility. With this concession as per above example, if bob sells half of his xyz shares for 6k (with original borrowed money of 5k). He can park the 5k in redraw of loan account and re-invest the 5k money to buy abc shares and maintain the tax deductibility as long as clear nexus is shown that money is not mixed with personal money.
     
  5. Terry_w

    Terry_w Structuring Lawyer and Finance Broker - all states Business Member

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    Is your loan a LOC product? ATO considers LOC to be refinanced each month.

    If you put the money into the loan and take it out again it will be new borrowings anyway.
     
  6. S0805

    S0805 Well-Known Member

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    No standard IO loan with redraw facility within that....even using redraw money isn't it considered as new borrowing...
     
  7. Terry_w

    Terry_w Structuring Lawyer and Finance Broker - all states Business Member

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    Yes redrawing is making new borrowings.
     
  8. S0805

    S0805 Well-Known Member

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    In practical sense...thinking not to mix money won't work. Example: Any trading platform (commsec, nabtrade, etc...) does not allow to deposit capital gain and cost base to separate accounts I know of....So using bob as example, if he sells 6k worth of shares which were bought for 5k, trading account provider will deposit entire 6k in cash management account rather than 1k of capital gain in separate account and 5k of initial borrowing in cash management account....so money is mixed straight away..
     
  9. Terry_w

    Terry_w Structuring Lawyer and Finance Broker - all states Business Member

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    The trading account is not a loan account. Once cash is received in the trading account you would repay the loan.
     
  10. William SHI

    William SHI Member

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    What will happen if Bob sells half the XYZ shares for $4,000 and pays that amount into the mixed purpose sub-account?

    Thanks!
     
  11. Terry_w

    Terry_w Structuring Lawyer and Finance Broker - all states Business Member

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    What did he pay for those shares?
     
  12. William SHI

    William SHI Member

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    As the example 4 says: Bob has a mixed purpose line of credit sub-account debt of $30,000 with $20,000 applied to the purchase of a private vehicle and $10,000 applied to purchase income producing shares in company XYZ.
    Then he get $4k from selling half of his shares XYZ shares with $1k loss and pay this $4k into the mixed purpose sub-account.
    How many outstanding debt applied to the XYZ shares will Bob hold now?
     
  13. Terry_w

    Terry_w Structuring Lawyer and Finance Broker - all states Business Member

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    If Bob purchased $10,000 worth of shares then half would be worth $5k.

    If he sells half for $4,000 he would have a $1000 loss so it could pay back the $4000 yet still have $6,000 woth of borrowings relating to these XYZ shares.

    Bob then works out the percentage
    $6,000/$24,000 =25% deductible

    This is provided Bob is able to keep claiming the interest on loss of $1,000
     
  14. William SHI

    William SHI Member

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    Why $24000?
    Not ($10000-$4000)/($30000-$4000)=23% deductible?
     
  15. Terry_w

    Terry_w Structuring Lawyer and Finance Broker - all states Business Member

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    Yes this looks correct.
     
  16. William SHI

    William SHI Member

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    If Bob get $8k from selling all of his XYZ shares with $2k loss and pay the $8k into the mixed purpose sub-account will he still have $2k deductible?
     
  17. Terry_w

    Terry_w Structuring Lawyer and Finance Broker - all states Business Member

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    possibly
     
  18. William SHI

    William SHI Member

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    Under what condition will it be deductible and what condition not?
     
  19. Terry_w

    Terry_w Structuring Lawyer and Finance Broker - all states Business Member

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  20. William SHI

    William SHI Member

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    If Bob has $100k extra repayments, is there any difference between redraw $100k and redraw $50k 2 times?