Tax Tip 6: Using Redraw to invest

I would be confirming with the lender that if you pay it down they will allow you a clean split for the $80K so its not blended with non-deductible debt. The draw down the new split directly to pay the relevant acquisition costs etc

 

I applied for a private ruling for this scenario.

I have a PPOR loan (split) linked with an Offset (fully offset), which I want to use to pay for my IP loan to reduce interest. (marked as 1 in attached pic)

I will use the funds in the offset to pay down the PPOR loan to < $1 (marked as 2).

Then I will redraw from my PPOR loan to pay down my IP loan (marked as 3).

I want to claim interest on my PPOR loan split as expense.

I spoke to my ATO case officer recently and I was told that I might not be able claim as it is not for investment in income producing assets.

Am I missing something? Any ideas @Terry_w @Paul@PFI ? Thanks.

 

It will depend on the finer details.

I have a successful private ruling for a client on a similar question.

 

Thanks, Terry. Do you have any "Tax Tip" related to this?

 

This might cover it
Strategy: Borrow Against the Main Residence for an Investment Loan (Shuffling Loans Around) Strategy: Borrow Against the Main Residence for an Investment Loan

 

Great thread as always. Thanks for that, Terry.

 

Great threads Terry!

Re debt recycling, what if you don’t have a big chunk of cash to start with, is it possible to regularly (say monthly) redraw funds that have been repaid to the home loan and add to investment portfolio?

for example, you have a home loan of $500k, minimum monthly repayments $2k. To apply debt recycling, you’d redraw $2k each month after the repayment and transfer to your ComSec. Is that correct? Is there a concern re mixed loan? If so, would we need to create many 2k worth split loans? What should be the way to debt recycling and invest on monthly basis?

thanking you.

 

check this out

Tax Tip 319: How to Debt Recycle when Investing in Small Amounts? Tax Tip 319: How to Debt Recycle when Investing in Small Amounts?

 

Excellent! Thanks Terry. That’s exactly what I was looking for

 

Hi @Terry_w ; Thanks for posting

please help me clear these doubts

Scenario
PPOR Loan - split into 3 parts
Fixed rate F1 without redraw
Variable (V1) - with redraw and offset
Variable (V2) - with redraw and offset.

Two offset accounts
Offset O1
Offset O2

Question 1 - Can you pay down V2 and redraw the funds in O2 and use it for investment purpose
Question 2 - Can you transfer the income/dividends got from investing the amount redrawn from v2, into v1 directly to reduce the PPOR amount.
Question 3 - Can you lend the Redrawn amount for V2 to the Family trust and use the amount for investment purpose if this a more tax efficient structure and whose advice do we need to set this up properly.

Do you see any issue with this ?

 

1. you can
2. this question doens't make sense. V2 appears to be a loan.
3. can the borrower redraw and onlend to the trustee of a discretionary trust?? yes

you should seek the advice of a solicitor. You are not asking the right questions and need to consider a lot

heaps of issues.

 

Apologies @Terry_w if the question hasnt been clear. I am first timer posting to the forum . I really liked the tax tips provided you. I havent seen any live example of some one using redraw from their home loan for investing and how the entire scenario has panned out for them . It would be helpful if this strategy can be explained step by step by some one who has applied and results from them.

 

What sort of results ?

Redraw use on a main residence is a bad idea. The typical tax issue we see is a taxpayer who thinks $50K of the home loan taken on redraw is investment out of a total borrowing of $250K. Fast forward three years and they get a ATO audit. ATO notes their interest deduction for the deductible element has been calcuated eg 2.7% x $50K = $1350

However ATO consider the correct basis is that 50/250 or 20% x actual interest is the deductible amount. And the present loan balance is reducing. Taxpayer disputes this and says - No I specifically borrowed $50K for investment. His new tax advice advice is that the deductible and non-deductible propertions remain fixed and 20% of actual interest must be used. You cant notionally apply repaymnets to one part and not the other. During the 2021 tax year total interest is $6000. The ATO amends the deduction to $1200 and applies penalties for recklessness and corrects the prior year also.

Taxpayer then asks Paul...Should I have split the new loan when I took from redraw. Paul agres it would be wise. It would eman any extra repaymnets can be specifically directed to the non-deductible loan element. The tax savings onb the deductible are preserved and allow the non-deductible interest to be minimised.

 

Step 1 Split the loan
step 2 pay into the split making sure it is not closed
Step 3 redraw - ideally to its destination
step 4 claim the interest, apportioning if need be

 

Good response - clear and simple. Great (general) advice.

 

Good morning all,

Recently had an AMP professional package home loan setup for a PPOR purchase, selected AMP and set it up with plans to debt recycle. Had one split created with $300k IO planning to purchase shares. Had a bit of a delay with another settlement so has meant that that $300k IO loan has been setup now for about 2 weeks before I've had the cash to pay it down.

I have confirmed with AMP that I can pay the $300k down to $0 and then redraw the money out without that loan being closed. So now I have the $300k sitting in an offset ready to pay it down and redraw for investing.

As it's an IO loan and I will be paying it fully down to $0 before redrawing for investing purposes, I presume I'll be able to separate the two week interest period on the PPOR from the interest going forward associated with shares so it won't be classified as mixed purpose loan after I pay it down to $0?

Cheers and thanks for a great resource!

 

that won't be a mixed loan if you use 100% of it for the one thing.

 

Thanks Terry, that's what I thought but just wanted to confirm. It will all be used to purchase shares, so all good. Cheers and thanks again!

 

It will still be mixed if you buy different parcels of shares - but this is acceptable. However if you are buying some that are not expected to pay dividends you need to split loans for this.

 

I recently encountered a range of issues with a borrower who used his loan to buy "shares and other investments". He thought it was all deducible. Its all investments.

Some was crypto held for gains
Some was ETFs with foreign income
Some was shares and ETFs not paying income
Some paid income

Taxpayer had to consider for time period AND use for each day and for the whole year a reasonable apportionment of total interest into several elements. He went to trouble of splitting the loan and it was still "blended". Some of the interest was deductible. some a CGT element, some a loss / deduction v foreign income etc

One problem is during the year the composition of what he held changed. Splitting doesnt help that.