Terryw’s Ideal Loan Structure

Thanks Terry!

 

Hi Terry,

Really appreciate the info you have provided.

Just wondering for expenses, how do we know whether to pay from Offset(From Loan A) or from Loan B.

E,g, reading previous post it seems Offset for rates, insurance and Loan B for dishwasher, aircon

Is Loan B just for the initial purchase of the property and then Offset(from Loan A thereafter?).

Thanks.

 

Pls see my tip on borroeing to pay for expenses.

 

This interests me a lot, how can you do it, let's say with a loc and not make it a scheme?

I understand interest to pay interest looks quite suspicious, but if it's to pay property managment fees etc how can it by clear it's not a scheme?

 

It can't be. that is why you need to seek tax advice on whether to apply for a private ruling or not.

see my warning at:
Tax Tip 4: Borrowing to Pay investment expenses https://propertychat.com.au/community/threads/tax-tip-4-borrowing-to-pay-investment-expenses.1554/

 

My pictorial attempt at the Tom and Jerry structure have I got this correct ?

 

Thats it. Nice diagram.

Except there will come a point when you want to pay off loan A or to split, pay it down in part and then redraw. Without paying down this loan it will become increasinly difficult to borrow in the current climate. but until you reach this point it is best to keep the cash in the offset.

 

So simple and easy to understand. Please make more diagrams like this !

 

A picture is a thousand words

How do you make these diagrams?

 

Power Point software or Keynote
I'm more a visual learner words and numbers just spin in my head.

 

Hi Terry

Thank you for this super informative post. Apologies if this is a dumb question, I'm still learning.. I have a PPOR on P/I with a 100 percent offset. Overtime I built the amount in the offset on top of the minimum PI payments i was making then used that amount in the offset to pay for the deposit and costs of an IP. I am assuming that this amount will not be tax deductible?

 

Not deductible because you are using cash to invest..

See
Tax Tip 9: Don’t use Cash in Offset account to Invest https://propertychat.com.au/communi...nt-use-cash-in-offset-account-to-invest.2355/

 

Thank you for clarifying Terry and for the wealth of information in those very detailed tips! Just to complicate it a bit.. I had to sell some shares to cover some costs for the initial deposit but while that happened (at a market rate i was happy with) i borrowed these funds from my family members one of which is overseas.
Can those specific funds be classified as a loan? What proof would need to be provided? It was an informal arrangement but I have the bank transfer records on the amounts borrowed.. I did however make the mistake of "mixing" this into the amount already in offset..

 

Not sure an informal agreement will stand up to the ATO regardless of bank transfers. How does the ATO know they were not for a gambling debt instead?

 

Yes you can borrow money from related parties. You can have an oral contract, but this should be put in writing asap for evidencing and other reasons. Additional issues with borrowing from overseas because of the withholding tax. see
Tax Tip 37: Withhold tax on interest you pay to overseas entities https://propertychat.com.au/communi...n-interest-you-pay-to-overseas-entities.3751/

 

That's what I will find difficult to prove.. Unless they are ok with bank transactions showing money transfers from family then a chunk going into the loan before any of my shares cash came in. Although there was savings in the offset too.
I agree it's messy.
Since its family I can formalise it asap though.

 

Thank you Terry! Another thing I didn't know!

 

What are the benefits of getting an LOC vs just another investment loan ?

 

Tax.

With other loans you, generally, can not pay for the expense directly. The money has to be borrowed and parked in another account and then paid out. This leads to potential for loss of deductibility.

Tax Tip 63: Don’t cause borrowed funds to take a detour https://propertychat.com.au/communi...t-cause-borrowed-funds-to-take-a-detour.5011/

But LOCs have 2 main disadvantanges
1) are generally at call rather than for say 30 years, and
2) higher rates.

So if you can use an IO loan instead, as long as you don't need to take the money on a detour.

If you can't use a LOC and then convert it to a IO loan after use.

AMP have a good product for this sort of thing.

 

Hi Terry, would you by any chance make a nice and simple thread like this on (residential) subdivision/development loan structure please? I've just posted my questions under Finance. Thanks a million!