Tax Tip 556: Redrawing to invest from a Loan that is in Credit

Discussion in 'Accounting & Tax' started by Terry_w, 19th Oct, 2023.

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  1. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Tax Tip 556: Redrawing to invest from a Loan that is in Credit


    Loans have negative balances usually. The borrower owes the bank the money they borrowed. But sometimes the loan facility can have a positive balance. This would occur where the borrower has paid more into the loan than they actually borrowed.


    Where the loan has a positive balance can the borrower use redraw to pay for an expense and claim they have borrowed to pay it?


    Example



    Homer has a loan with a limit of $300,000. It was used for his main residence purchase. He gets confuses between offsets and redraw and pays $350,000 into the loan.

    It now has a $50,000 positive balance.

    That means the bank owes Homer $50,000 now the other way around.



    Homer then goes out and pays $50,000 deposit on an investment property. The balance of then loan then becomes nil.



    Has Homer borrowed to invest?



    He has in a way as he has used redraw. But it was really only his cash that he borrowed.



    It may not matter immediately as there is no interest anyway.



    But what if Homer then borrows another $50,000 to buy a gold plated toilet seat.



    The balance of the loan is now $50,000


    Could it be argued that $100,000 has been borrowed but only $50,000 used to invest so 50% of the interest would then be deductible?


    Its hard to know but I would say no. None of the interest would be deductible.


    Now reverse the situation where the gold plated personal expenses is purchased first using redraw, the balance it nil and then the amount for investing is redrawn.


    I would say all of the interest on the loan could then be deductible.
     
  2. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    But the interest charge is based on $50K, not $100K so its self correcting...Depends how the "investment" was settled too...Many people fail to consider the whole chain of events

    $50K loan redraw and $50K loan is credit leaves a net $50K loan...$50K is savings. You cant consider the first $50K is one or the other purpose. So if you draw $100K out in one transaction and put $50K into a savings account and $50K into Commsec then its possible a blended loan issue occurs. 50% of the interest is deductible. BUT if you drew the $50K to savings to bring the loan to $0 balance and THEN redraw advance $50K and move that to Commsec its likely fully deductible as Commsec is clearly settled with new borrowed funds to invest. You wouldnt do it the other way about either !!
     
  3. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    But would it be 50% of the interest on the $50k balance or 100%
     
  4. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    As I said...Depends how the borrowed funds are utilised. Perhaps 100%, perhaps 50%, perhaps 0%
     
  5. craigc

    craigc Well-Known Member

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    It doesn’t mention if the gold plated toilet seat is for the IP or his main residence. :D
     
  6. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    I have never encountered anyone that has installed a gold plated toilet on an investment property. Tenants will not see the value.
     
  7. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Tenants would deny there was ever a gold toilet seat and replace with a gold spray painted one. And then the question will be if it theft or a civil issue ?

    If a client came to me I would not claim depreciation on a gold toilet seat unless a private ruling was obtained. Its a bit like good art. It may not decline in value. Had a client who was a highly paid medico. he had a super exy watch and said is it depreciable ?

    ATO ruling said no. Its a collectible asset and they also considered if could be a personal use asset that is also used for work but this doesnt allow any deduction. So no interest deduction either. Costs of ownership may be CGT outgoings.
     
    Last edited: 26th Oct, 2023
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  8. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Thats interesting. I recall Mike telling me a story about an expensive watch which his client was able to claim depreciation on. Apparently he needed to know the time for work meetings or something. I never claimed by apply watch as forgot about doing so until I accidentally answered a client call while in the shower.
     
  9. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    In this case the watch was absurdly costly. $200K plus. There was also a GST issue with the purchase. ATO said because its second hand collectible and over $300 the GST cant be 100% creditable and the value that is cannot be determined. The second hand goods rule applies which says you can only determine GST to claim on purchase when you later sell. (I was unaware of that one). I have seen others where it is just costly and if acquired new as retail I dont see a issue provided the time issue is related to work or depreciation is apportioned. Problem with depreciation is the rate may exceed true loss of value and leave a balancing adjustment issue. But when acquired as a rare and collectible (1970s rolex or something similiar) the cost was way way above current retail triggering my concern.

    Have also seen a handbag- Female exec. $30K and no issue. And another a public Co Director who argued fashion attire was deductible...No it was conventional attire. Wouldnt accept no so a ruling was requested. The decision was No.

    My wife lives in the apple world. Her laptop, phone, earbuds and watch are how she manages the days events and communications incl text, email etc. 24/7 unfortunately. All % deductible (depreciation etc). Very normal for many people now.
     
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  10. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    It is the tax of the poor funding the expensive purchases of the rich - or subsidizing it.
     
  11. craigc

    craigc Well-Known Member

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    If I recall the example on PC I think it may have been an expensive dive watch required to work at depths for a professional scuba diver. Could be mistaken though.
     
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  12. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Yes Reminds me I had a ADF naval clearance diver with a costly watch and he replaced it each 2 years or so. Made sense and the specific need v a office worker who dives on weekends (hobby) may be very different.

    Nurses also often have a watch that is pinned to uniform that can be read inverted...specific to job.

    [​IMG]
     
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