Where to park excess loan funds - offset against PPoR?

Discussion in 'Accounting & Tax' started by KayTea, 17th Mar, 2017.

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  1. KayTea

    KayTea Well-Known Member

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    Hi everyone.

    A little while ago, I borrowed for an IP (using 2 separate loans), and ended up with an excess of loan funds. As not all the money was drawn down at the completion of the purchase, this money has been sitting in the initial transaction account that was set up as an offset against that IP. At the time of settlement, it was recommended that I hold onto those funds, and use them for maintenance or paying bills etc related to that property (if the income received from it couldn't cover the costs).

    Fast forward - I now have a different transaction account that is used solely for managing the income from and expenses for that IP (which is offset against my PPoR).

    Question - can I move the excess funds from the draw down (original) account into my PPoR offset (new) account? I'd rather use this money for offsetting against my PPoR than the IP, but am worried about how the bank might see the use of those funds (especially if they are transferred into a personal transaction account), and worried about possible tax implications.

    I'd rather ask the question now, and look stupid, than ask later (after I've done it), and look like an idiot (because I'd totally mixed up loan funds etc, and can't claim the IP interest on tax, or some other such situation).

    TIA,
    KayTea
     
  2. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    the bank wont care ( this week)

    Question pls

    what other cash was in the offset account with the loan money ?

    If mixed with wages and savings etc claiming interest on the future use will be tough.

    Seek Tax advice


    ta
    rolf
     
  3. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    The issue is one of tax deductions. You seem to have a blended loan. Much has been written on PC about this and you should review this info.

    The original loan is NOT 100% deductible if the use of the balance is not offset to that loan. See you havent used the borrowed proceeds for a deductible purpose for the same loan. Remember loan interest is deductible to the extent the proceeds are USED for an income producing purpose.

    You may be better checking you have a redraw facility on the original loan and actual repay it. Then if you seek to use the funds for a deductible purpose either split the loan and draw the funds on the split if its for another property OR draw and use the funds for the expenses as proposed ensuring the offset is to that same loan and NOT your home. If you offset against your home a % of the borrwing would be non-deductible.
     
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  4. KayTea

    KayTea Well-Known Member

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    The original loan is NOT 100% deductible if the use of the balance is not offset to that loan. See you havent used the borrowed proceeds for a deductible purpose for the same loan. Remember loan interest is deductible to the extent the proceeds are USED for an income producing purpose.
    [/QUOTE]

    At the moment, this 'extra' loan money is sitting 100% offset against the IP it was borrowed for. The only money that has ever come into this account is the money from the bank for the purchase of the IP - there has never been wages etc mixed in with it.

    If I just leave it sitting there, offset against the IP and not my PPoR, then I believe that there is no mixed purpose occurring. It can just sit there, until I need it, for expenses against the IP it was originally borrowed for.

    Thanks for the confirmation - I thought it was safest to leave it (and that's why I haven't moved it before now). Just thought I'd check I was doing the right thing :)
     
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  5. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Yes it seems its not blended with other money OR applied to the home.

    Depending on the amount and how its used paying IP expenses to enhance the deductible interest may not be wise. Part IVA anti avoidance rules could be used by the ATO if there appears a scheme element to the arrangement. This is complex but lets say you a engineering a increase in the deductible loan interest by paying those outgoings while at the same time engineering a reduction in own home debt they could take the view the enhanced interest deduction is a scheme.....Why didnt you borrow to pay your own home outgoings ?? Its complex but the bigger the value and the apparent efforts the more likley that view could be adopted.

    Paying outgoings using borrowed $ is definitely allowed dont get me wrong (barring paying loan repayments using a loan is many cases). The issue can occur if you make efforts to increase deductibe interest using a systemic ongoing process while seeking to ignore or benefit your non-deductible debt.
     
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  6. Sonamic

    Sonamic Well-Known Member

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    Is the rent from the new IP going into the offset alongside the surplus funds?

    I had the same situation. My accountants advice, as Paul mentioned above, was to put the surplus $ back into the IP loan they originally came from before they got mixed with other monies. Provided the funds haven't been tainted in this way you should be fine.
     
    KayTea likes this.