Tax Tip 67: Using Redraw Facilities on loans and Tax Issues

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

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  1. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Member

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    Taking money, or redrawing, from a loan means you are borrowing money. It is considered new borrowings - a new loan even though it may be from the same loan account. This gets a lot of people in trouble.

    Say you had a $100,000 loan and had paid it down to $90,000. You used the $100k to purchase the property originally. Now with $10k available you withdraw that money to buy a car. It is now one loan with 2 purposes - $90k for the purchase of the property and $10k for the car. The loan is now a mixed purpose loan. This doesn’t really matter while you are living in the property, but will later if you want to start claiming the interest (e.g. if property is income producing).

    But redraw can be used in a way which doesn’t create tax issues.

    Where the loan is paid off in full. There is no need to discharge the loan and apply for a new one. The person can simply use redraw.

    Example
    Say you had a $100,000 loan and had enough money to pay it off in full. You could simply pay down the $100,000 and then redraw the $100,000 and use this to buy the property. Since you have borrowed to invest the interest on the loan will be deductible - if there are no detours.

    But be careful because if you pay down loans with some banks the loan will be closed. Check carefully before doing this. If your loan will be closed you may leave just $100 or so outstanding. Technically the loan will be a mixed purpose loan, but $100 in $100,000 is just 0.1%.

    Also avoid redrawing the money to a savings or cheque account. Pay directly from the loan using redraw or go in and get a bank cheque. Otherwise, you could ruin deductibility.

    See my other tips on redraw
    Tax Tip 6: Using Redraw to invest
    https://propertychat.com.au/community/threads/tax-tip-6-using-redraw-to-invest.1837/

    Tax Tip 19: Avoid Using Redraw on an Owner Occupied Loan https://propertychat.com.au/community/threads/tax-tip-19-avoid-using-redraw-on-an-owner-occupied-loan.2898/
     
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  2. pippen

    pippen Well-Known Member

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    So one could pay down a p+I ppor loan from say 200k down to 0 ( or 100 dollars) then use redraw and purchase shares for instance at the lower ppor rate and claim the interest as an expense due to using the funds for investment purposes?

    Hoe does the detour of funds work as you mentioned if for instance I have a commbank direct investment account to purchase shares? CDIA account. Can the money stay in there for a while or do I have to invest straight away to buy 30k in argo for example and say 50k bki!

    Many thanks!
     
  3. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Member

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    See
    Tax Tip 1: Parking borrowed money in an offset account https://propertychat.com.au/communi...ing-borrowed-money-in-an-offset-account.1313/
     
  4. Ross36

    Ross36 Well-Known Member

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    Hi Terry,

    A quick question about redraw I don't think has been covered after reading all of your brilliant tax posts.

    Loan A PPOR: 300K loan, 100K extra paid off and available for redraw
    Loan B PPOR : 100K IO loan with none paid off
    Loan C PPOR : 100K IO loan with none paid off

    Assuming I never intend to rent out the PPOR (we wouldn't - we'd sell), if I:
    1) redraw the 100K from Loan A to a savings account
    2) pay this into Loan B (with a $1 left to ensure it doesn't close the loan)
    3) redraw it all from Loan B to invest directly in shares (no diversion to savings account)

    Can I claim tax deductions on the interest paid in Loan B after investing? Can I then repeat the process with Loan C (i.e. gradually save 100k into Loan A, then transfer to Loan C and invest)?

    I ask because it is technically re-borrowing from Loan A to pay Loan B and was unsure if this matters.

    Thanks for your help

    Ross
     
  5. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Member

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    Possibly deductible depending on circumstances.

    Seek tax advice
     
  6. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

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    That is how debt recycling works. If the new Loan B is used to buy INCOME producing shares it should be deductible v's the investment income produced by those shares. But if used to buy shares in a non-dividend paying co the interest for that parcel is NOT deductible. You could taint the loan and have a blended loan problem.

    One of the problems with using home loans for shares is buying non-income producing shares. Another problem is when you sell them. You can stuff the loan completely and not realise it. Let me use a few examples:
    1. You buy $80K of CBA shares and $20K of shares in Sydney NW Metro (hasnt paid a div yet). So only 80% is deductible.
    2. You buy $80K of CBA shares and $20K of NAB shares. 100% deductible BUT....
    2a. You sell the NAB shares for the same $20K and then buy a new parcel of Metro. Now 20% is non-deductible.
    2b. You sell the NAB shares for only $10K. And buy another $10k of CBA. Loan is $100K and yet shares are worth $90K....Still 100% deductible...Now read on.
    2c. You sell half the CBA shares for a profit and the sale is worth $50K. How much must the loan be reduced by ? If all $50K is credit to the loan it would be a mistake. Only $40K was borrowed for those shares. Repaying more blends the loan further...

    Rules of repaying shares:
    1. When sold always repay the borrowing. Deductions stop on that day.
    2. If you sell one parcel and buy another on same day - You need to consider if the new acquisition is also deductible . If not loan is blended.
    3. When sold for profit only repay what was originally borrowed
    4 When sold for a loss repay using sale proceeds in full (no more)

    After a while the loan can be hopelessly impossible to pass a deductibility test. eg a Loan of $100K and shares worth $45K or even $110K with past purchases of non-income producing shares evident.

    Margin scheme facilities can avoid these issues since the way they work protects errors. However most margin scheme loans use the full sale proceeds to repay all existing debt. But since only income earning shares are permitted the risks are far less of getting into a mess.

    And MS loans dont use property as security. They use the shares in the portfolio.
     
    Last edited: 26th Jul, 2018
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  7. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Member

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    Ross I think you might have a problem.
    $100,000 redrawn from loan A so you are incurring interest on that.
     
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  8. Silverson

    Silverson Well-Known Member

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    Evening Terry, would this only work if funds redrawn are used for investment purposes?
    I.e. If you redrew that 100k to buy a new ppor and turn current home into an IP then the interest on that 100k would still not be deductible due to purpose of the funds?
     
  9. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Member

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    Its the use that counts. so if you borrow to buy a main residence not deductible.
     
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  10. Ross36

    Ross36 Well-Known Member

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    Thanks for the responses guys:
    Paul - the plan is as you've mentioned, to use the money from Loan B (i.e the one maxed out then redrawn and invested in dividend producing ETFs) for debt recycling.
    Terry - Do you mean that the interest is actually associated with Loan A, even though the money is coming from Loan B directly into shares? This is the part that is a little unclear to me, as it seems I might be borrowing money from myself (i.e. Loan A lending to Loan B) then borrowing from Loan B to invest in income producing shares.

    In a nutshell it is:
    Loan A to cash (personal use), cash to Loan B, Loan B directly to shares (taxable income investment). Intention to deduct interest associated with Loan B from taxable income each year.

    Thanks again for your thoughts, I'm trying to get my head around some key concepts before I get "official" advice so I have a better idea of what to ask.
     
  11. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Member

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    Is money coming out of loan A?
     
  12. Ross36

    Ross36 Well-Known Member

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    100K is being redrawn from loan A to a savings account, then 100K paid into loan B to max it out. The 100K in Loan B is then redrawn and paid directly into a share trading account, then the entire amount use to purchase shares the same day.
     
  13. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Member

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    So you will incur interest on loan A won't you?
     
  14. Ross36

    Ross36 Well-Known Member

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    Technically yes - but also on Loan B given it is paid down to $1 but then redrawn all the way back to 100K. The borrowings on Loan A would be non-deductible because the money went to cash, but the borrowings on Loan B would be deductible because it went to a taxable income generating investment IF it works as I think it does.
     
  15. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Member

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    Why not just invest directly from Loan A?
    Probably because it would then be a mixed purpose loan.

    In that case why not just pay the $100k into Loan B

    The trouble with what you are doing is that borrowing, parking, borrowing, parking - all weakens the connection between the incurring of interest and the investing.
     
  16. Ross36

    Ross36 Well-Known Member

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    As you mention - I'm not investing from Loan A as it would mix the loan. I am borrowing from it, then "parking" in offset account. This money is then being paid into Loan B, but no further parking as the money will go as straight as possible into shares (i.e. from this loan into share trading account then into shares within a day of it being put into the shares account).

    I'm trying to keep loan A always personal use, and Loan B, C etc. investment only once I have built up enough money in loan A to transfer over and redraw for investments.
     
  17. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Member

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    Not something I would suggest you do