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Tax Tip 6: Using Redraw to invest

Discussion in 'Accounting & Tax' started by Terry_w, 25th Jul, 2015.

  1. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Using Redraw to invest


    Withdrawing from a loan is considered new borrowings for tax purposes. So the same principles apply as to all loans. It is generally the use the borrowed funds are put to that determines deductibility. The security of the loan does not matter for tax deductibility reasons.


    The reason using redraw is generally a no no is it usually results in a mixed purpose loan. If there are other monies which have been drawn down and used for other things then increasing one loan to buy a property will result in a mixed purpose loan. See my other tip on why not to mix loan purposes.


    So unless your loan account balance is $0 it is best not to use redraw but to set up a new split before borrowing.


    However where your loan is Interest Only it is possible to use redraw and to later split the loan into the relevant portions. If doing this you should not make any deposits to the loan account other than interest.


    Ideally you would split before borrowing but some people buy property at short notice with no planning.


    The main point is that using redraw will result in a mixed purpose loan - unless the redrawn amount is used for the same purpose as the underlying loan.
     
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  2. applebyte

    applebyte Member

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    Say an IO IP loan of 400k, was topped up to 500k, then your redrew 100k to go towards a new IP. All good?
     
  3. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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  4. serendip

    serendip Well-Known Member

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    Q1: So if you had a PPOR split loan, loan A 400K and loan B 40K. Once Loan B was zero you could use it as a deposit for an IP and the interest would be deductible?

    Q2: But it would be better to use a LOC for non-deductible items such as stamp duty etc?

    Q3: then put everything in the offset account against loan A
     
  5. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    1. provided you paid directly from the loan, yes.

    2. Better than cash? Certainly yes

    3. All income into offset against PPOR or non deductible debt. If none then offset on the loan with the highest interest.
     
  6. Gingin

    Gingin Well-Known Member

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    Hi terry,

    Thx for your time and expertise in this area. I have an ip which I've refinanced with an offset in order to fund the construction of a granny flat on the ip.

    My understanding is that the construction costs are claimable as it will be income producing. Is this the case?
     
  7. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Interest on construction costs may be claimable if you haven't contaminated the loan.
    Tax Tip 1: Parking borrowed money in an offset account https://propertychat.com.au/communi...ing-borrowed-money-in-an-offset-account.1313/
     
  8. e96anban

    e96anban Member

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    Hi Terry,
    You mentioned in point 1. 'if paid directly from loan'. What if my loan is linked to transaction account that i need to pass thru first before i make a payment? Can I redraw funds to the transaction acc and pay the exact amount out of the account. Would i still be able to claim interest deduction?
     
    Last edited: 1st Sep, 2015
  9. KayTea

    KayTea Well-Known Member

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    I read these 'serious finance' threads and my head ends up seriously hurting. :(

    Between LOC vs offset, contaminated loans, parking funds, splitting, redrawing…… it all just gets too much.

    I can't decide (a) whether wine, or chocolate, will do a better job of making the headache go away, and (b) why I can't just have a massive lotto win, and then not have to worry about all this hard work and serious financial knowledge that I need to have, in order to make a few $$$.

    I love the idea of investing, but at the functional level, it gets very, very complicated, and I'm worried that I'll stuff something up (without knowing it at the time) - it's only the tax man who'll fill me in on the errors of my ways……...:eek:
     
  10. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    No. See the Domjan case for authority.

    If the transaction account contained no money at all you MIGHT have a chance. Better off not doing this.
     
  11. e96anban

    e96anban Member

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    Hi Terry,

    This is what I obtained from looking up on Domjan Case. I am no expert but it seems like she have used the redraw funds for private purpose, which naturally means it is not tax deductable.
    But say that you have an IO split loan which you have fully repaid and have redraw facility. When i redraw funds to pay for a deposit, it gets credited to my linked transaction account and then i pay it directly to the vendor. That way there is a unbroken link from the source of borrowing to the payment of deposit? And the redraw loan account remains uncontaminated, no?
    Besides, i am not aware that you can make direct payments from I/O loan accounts? Unless it is a LOC account.
    Pls help to enlighten me.

    The excerpt:
    "In Domjan’s case, the Administrative Appeals Tribunal (“the Tribunal”) denied a deduction for certain interest expenses that were incurred in respect of a jointly held loan account (originally used to purchase a number of rental properties) because funds were withdrawn for private purposes under the ‘redraw’ facility attached to the loan.
    The Tribunal held that each redraw under the redraw facility constituted a new borrowing of funds and, therefore, it was necessary to consider the ‘use’ to which these funds were put in order to determine whether interest was deductible to the taxpayer.
    Therefore, where an investor applies original borrowed funds for income producing purposes (e.g., the acquisition of a rental property) but uses a redraw facility for private purposes, the loan account becomes a mixed purpose account, being partially for income producing purposes and nonincome producing purposes. As a result, interest needs to be apportioned. "
     
  12. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    See my post above. What you have quoted is not relevant for your situation.
    From memory paragraph 42 of Domjan. You would borrowing to invest into a savings account. Once in the savings account it is no longer borrowed money.

    See also my first tax tip.
     
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  13. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Paragraph 44 it is

    44. The Commissioner relies on this authority to submit that once an amount of money is deposited into an account that already contains funds the account becomes a mixed pool of funds and it is not possible to determine the source of each withdrawal. It is impossible to determine whether the funds used to pay an otherwise deductible expense are sourced from the monies at interest or whether the funds used are sourced from Mrs Domjan's own monies.

    45. It is further contended that once the funds that Mrs Domjan has drawn down were commingled with other funds in the cheque/ savings and Visa accounts the essential nexus was lost and it became impossible to say whether any particular part of the interest paid on the loan facility related to income producing expenditure.

    46. I accept the Commissioner's submissions. Where the funds have been intermingled it is impossible to determine the use to which they have been put. In other words the purpose of the borrowing cannot be ascertained. It cannot be said that the expenditure — that is the payment of interest — has been incurred in the course of gaining or producing assessable income (FC of T v Payne 94 ATC 4191; (1994) 28 ATR 58).
     
  14. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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  15. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Its really simple - if you borrow to invest you can generally claim the interest. People get into trouble when they take detours, mix, pay first and borrow later etc.
     
  16. e96anban

    e96anban Member

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    Thanks a lot for the information terry. Basing on the paragraph 44...what if the transaction account has nil funds at the time of redraw. Ie the borrowed funds did not mix with any existing funds at the time?
     
  17. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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  18. e96anban

    e96anban Member

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    Thanks heaps Terry. Your tips are excellent!!!
     
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  19. Observer

    Observer Well-Known Member

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    Hi @Terry_w. What about borrowing to pay for B&P, solicitor fees, stamp duty. From my understanding those are the capital expenses and the interest can't be claimed on those.

    If that's the case would it make sense to split an equity loan into two loans: one for tax deductible expenses and the other one for non deductible? So as to avoid using any cash to invest at all.
     
    Last edited: 21st Oct, 2015
  20. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    You can borrow for capital expenses. The property itself is a capital expense.