Using redraw to invest

Discussion in 'Accounting & Tax' started by Ash2992, 7th Feb, 2020.

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  1. Ash2992

    Ash2992 Member

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    Hi

    Currently have one IP worth $600k ($350k outstanding loan). I have the option of $70k redraw.

    Is it worth using this redraw to purchase my next IP? This will allow me to have 20% deposit (including my savings) and I can avoid LMI.

    Any other considerations?
     
  2. Terry_w

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

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    It sure would be

    Tax is the major consideration. Best to split the loan and avoid detours - pay the $70k directly to the relevant destination.
     
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  3. Ash2992

    Ash2992 Member

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    Thanks Terry. Does that mean to have a split loan for the 350k balance and the 70k redraw?

    Can I claim interest on the 70k I will redraw?
     
  4. Terry_w

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

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    Yes, and
    Yes if you do things right

    Read my tax tips and then seeks specific tax advice.
     
  5. Ash2992

    Ash2992 Member

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    I have read Legal Tip 15: An issue with mixed purpose loans where both portions are investment - will this apply to me?
     
  6. Terry_w

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

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    Yes, but read the tax one about the exception to the rule
     
  7. Terry_w

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

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    but if you cannot split easily and the same entity that owns the current property will own the new one it is no big deal not splitting.
     
  8. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

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    Its easy to stuff up deductions on any loan used to buy shares split or not. Split is better. But its doesnt mean the problem has gone. I just encountered that very issue with a client.

    4 year ago Mick borrowed $110,000 against a clean loan. He transferred all this to Commsec and purchased (for example) CBA, NAB and Telstra shares. They all pay dividends. No issues. Fast forward..... He sells the TLS and NAB and buys into two managed funds (Platinum). One pays no income. And another was wound up after 6 mths with only a CGT event. The third new investment was a stock a mate recommended. A potential future float which should do well. NYSE listing coming. Funds were drawn from Commsec and paid to the US broker after hitting his personal account. His bank said that the ONLY way to buy a foreign draft was either the fund credits the bank OR is drawn from his savings. They cant draw on his loan. The draft was raised by the bank by transfer from his loan to his savings account and then buying the draft.

    How much is deductible ?
    Original advance for CBA is...365 days
    Then Nothing for the two platinum funds. However the interest does capitalise and may reduce a future gain. Apportioned for days etc.
    Then (maybe) nothing at all for the US shares which also would otherwise be a CGT cost? We have sought a ruling that seeks deductible use of USD as the bank applied the funds that way not the taxpayer so that the interest is a CGT cost. Technically based on the bank rule no loan could even be deductible when transacted at a branch as customers must buy currency from the branch and not through any loan. The customer is forced to transfer the funds first. Our arguement is that the customer has borrowed funds to buy a CGT asset (currency) And that borrowing is crystalised and made when the asset is given, not when the funds are drawn. The bank is a custodian for customer monies.
     
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