Join Australia's most dynamic and respected property investment community

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.

  1. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

    Joined:
    18th Jun, 2015
    Posts:
    8,973
    Location:
    Sydney
    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
     
    S0805 likes this.
  2. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

    Joined:
    18th Jun, 2015
    Posts:
    8,973
    Location:
    Sydney
    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.
     
  3. DanW

    DanW Well-Known Member

    Joined:
    26th Jun, 2015
    Posts:
    400
    Location:
    Sydney
    Thanks Terry!

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