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Withdrawl of surplus fund - tax implications

Discussion in 'Accounting & Tax' started by SaberX, 21st Apr, 2016.

  1. SaberX

    SaberX Well-Known Member

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    Hi all,

    Having worked in the accounting/finance industry previously i recognise the eggshells you walk with seemingly 'harmless' redrawing /taking out money out of loan accounts without a second thought - only to be told you've just complicated the deductibility of your loan i.e. having to apportion your interest deductions forever and ever for that 0.05% private use you drew back out.

    That said - I'd love to hear those who have experience and practical experience with the following scenario:

    My bank handled the FHOG application, and has plonked the $10,000 straight into my home loan account.... now they've advised me i have a few thousand dollars as 'surplus funds' after taking into account future builder progress payments as well as post-construction third party invoices. They claim that while this money shows up in my banking as against my loan account (so thereby reducing the borrowings by $10,000 and increasing my remaining available credit limit by $10,000 as a result), they have advised that behind the scenes on the bank side it is kept quarantined so that any surplus funds can be worked out and returned.

    It's easy to have it paid out to me, but my worry is it will be considered a repayment of $10,000, and a redraw of money for a non-property purpose (even if plonking it straight back into the offset account).

    It would be a pain if ever audited if they deem 99.8% of the loan is for property purposes, and the other 0.2% should have been quarantined. I plan to live in it before i eventually rent it out, hence why interest deductiblity/offset in the future was a big part of my plans. Having as much liquid funds via the offset was therefore my intention than repaying out of the loan.

    I don't know if this is normal bank protocol, wish they'd asked first. I was conservative in adding in quotes for painting and other items which i may even DIY, so in that sense my surplus funds by end of build might even end up being higher.

    any advice please? holding off on releasing the funds until a clearer picture is available.
     
  2. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    So they credited $10K to the loan and so the balance at present is $10K Credit ?

    I see no issue. The first $10K of costs drawn on the loan (for construct, duty, legals or whatever) would deplete that until the balance is zero. Then the borrowing commences and ultimately maxing out at the approved $ limit. It doesnt affect interest. As long as you dont pull out $10K and go on a holiday from the LOAN proceeds I see no issue. If you drew the $10K first for a holiday it has zero effect. Its not borrowed money at that point.
     
  3. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Yes it is a repayment and taking it out will be new borrowings.
    Taking it out now would mean there is a mixed loan.

    Try to get the bank to reverse the transaction - as if it never was deposited into the loan.
     
  4. SaberX

    SaberX Well-Known Member

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    NO - unfortunately the loan was drawn to say 250k so therefore loan balance was -250k on my online banking. WIth a 500k credit limit. I had settled my land previously already, and just paid the slab down stage.

    SO the FHOG essentially would have reduced it to 240k and boosted 'available credit' left by 10k correspondingly. They mentione dit was 'quarantined' in their system. So while they can just release it at my command - i didn't think it smelled right that all would be right on the tax side.

    This is a big issue as i realise i had quoted for many third party 'potential' costs i.e. painting , which would soak up some of the 10,000 grant. When i eventually do these myself or don't take up the costs altogether, then i would have even more avialable surplus left over and 'locked away' essentially.

    @Terry_w with this in mind - would drawing the surplus funds out at end of loan or even now but with a documented/invoice supported spend on items to be used in the house i.e. on painting, diy blinds and window treatments etc. be deemed as property related , and not private?

    I would be living in the house in the short term but would eventually rent it out in one or two years i believe , depending on how life goes.

    I'll ask if they can reverse it. But it was the government's FHOG payment, which may complicate process.
     
  5. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    If you borrow the $10k and use it directly for property costs the loan would all be still one purpose. but you have to make sure the funds don't take a detour and get mixed along the way.
     
  6. SaberX

    SaberX Well-Known Member

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    I can't have the $10k reversed, according to the progress payments team it was instructed as construction funds via my broker. Obviously it hasn't been thought out that excess surplus funds or the like would then have to be redrawn to be paid out to my offset account , and the relevant tax implications. Being an accountant previously by nature I would have picked up on this but I guess this is what happens when you outsource to the broker/bank to take care of the application. Thank god the stamp duty refund cheque was handled by me personally and will go to me directly... in much more capable hands.

    By not taking a detour what do you suggest? If i have it all paid out to my offset account, and then subsequently withdrawn in cash and paid out to tradies do you think I could still avoid having it mixed along the way?

    My worry is if i have 10k in my offset and i have it paid out to there, say 5k. And i have various in and out transactions - personal, repayments of loan etc, but the balance never dips below $5,000, when i do eventually incur $5k of house related costs, will they argue that the $5k surplus funds can't be uniquely distinguished as not having gone in and out through all your personal transactions?

    This is very frustrating because a $300k loan, is still a 300k loan in terms of interest. just the notional deposit of $10,000, will knock the loan balance to 290k, then from what we have concluded you're saying the payout of this surplus amount, even though increasing the loan back to the same underlying $300k of loan that was needed originally, would be viewed as if you only ever borrowed $290k for the home, plus $10k borrowed for personal uses?

    Any other ideas?

    They won't let me offset leaving the surplus funds in the home loan account as a repayment of my monthly interest amounts. Although does the bank ever cheque that you made a payment of the interest only amounts? I mean if i just had the surplus funds released to remain in the loan account, if i don't make any mortgage payments for 3 or 4 months, will they still ask me to cough up and disregard the fact that they released surplus funds into the loan account already that are equal or greater than the interest charged?
     
  7. SaberX

    SaberX Well-Known Member

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    Question:

    In this scenario if $300k was the original loan, and the surplus FHOG was $10k which was received into the loan to reduce it to 290k (i.e. the bank didn't need it for equity contributiosn) , and subsequently after paying out all builder/invoices, and they disbursed the $10k back to your offset account thereby increasing the loan back to $300k. Clearly you've mentioned above this would be deemed $10k borrowed privately. But if during this time one was living in this as their first home for the first 5 years, then switched to an investment property, would they begin tracing the home loan amount from the date of switching to an investment property?

    Or tax purposes would the ATO trace back right to day 0 what is technically 'property' related, in which case they would still rule that $10k was repaid off the loan amount, redrawn, and ignore the fact that the $10k wasn't meant to be paid in the first place (as it was just excess surplus funds deposited by the bank). Would a letter by the bank acknowledging it was just surplus funds and not technically a repayment and redrawl make a difference? Or will the ATO just see $10,000 on the statement being deposited, redrawn out, and treat it as a redraw of money again as such?
     
  8. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Brokers cannot give tax advice so you can’t really blame them.



    By not taking a detour what do you suggest? If i have it all paid out to my offset account, and then subsequently withdrawn in cash and paid out to tradies do you think I could still avoid having it mixed along the way?



    Perhaps if your offset account contains no other funds. If it does contain funds then no chance of the interest being fully deductible. It will also create a mixed loan.



    This is very frustrating because a $300k loan, is still a 300k loan in terms of interest. just the notional deposit of $10,000, will knock the loan balance to 290k, then from what we have concluded you're saying the payout of this surplus amount, even though increasing the loan back to the same underlying $300k of loan that was needed originally, would be viewed as if you only ever borrowed $290k for the home, plus $10k borrowed for personal uses?

    Yes.

    It is like pissing in a cup of milk. You cannot simply take the piss out of it.



    They won't let me offset leaving the surplus funds in the home loan account as a repayment of my monthly interest amounts. Although does the bank ever cheque that you made a payment of the interest only amounts? I mean if i just had the surplus funds released to remain in the loan account, if i don't make any mortgage payments for 3 or 4 months, will they still ask me to cough up and disregard the fact that they released surplus funds into the loan account already that are equal or greater than the interest charged?



    Not sure I fully understand what you are saying, but it seems you want to capitalise the interest. This has different tax issues. It may be fine, but if you are doing it to increase deductions you run the risk of Part IVA being used to deny the deduction.

    But from a lender point of view if you don’t pay the interest each month you will be in default. Some LOC products allow capitalising though.
     
  9. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    But if during this time one was living in this as their first home for the first 5 years, then switched to an investment property, would they begin tracing the home loan amount from the date of switching to an investment property?



    There will be no deductions claimed during the first 5 years so no effect until you do claim the interest. Then you will only be able to claim the amount of interest associated with the loan used to purchase the property. This would be $290k assuming it was interest only.



    Would a letter by the bank acknowledging it was just surplus funds and not technically a repayment and redrawl make a difference? Or will the ATO just see $10,000 on the statement being deposited, redrawn out, and treat it as a redraw of money again as such?



    A payment into a loan is technically a repayment and a letter doesn’t change this.
     
  10. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    A possible solution - a separate offset account.
     
  11. SaberX

    SaberX Well-Known Member

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    >>Perhaps if your offset account contains no other funds. If it does contain funds then no chance of the interest being fully deductible. It will also create a mixed loan.

    In other words once the funds are released into the offset account which has funds from the past deposited in, and will have funds taken out in the future, whether you maintain a balance of a million dollars in that offset account, they look at it as in a portion of your surplus funds is premixed into the general '1 million' balance, so any withdrawls and movements from thereon for private usage etc. will taint it straight away?

    >>Not sure I fully understand what you are saying, but it seems you want to capitalise the interest. This has different tax issues. It may be fine, but if you are doing it to increase deductions you run the risk of Part IVA being used to deny the deduction.
    But from a lender point of view if you don’t pay the interest each month you will be in default. Some LOC products allow capitalising though.


    What I was getting at was, say each month my interest only repayment is $1,000 fixed for simplicity. I know that if my third party invoices in 12 months time, once paid, will result in total home loan and required owner contributed funds to be in excess (excess surplus funds) of $3,000 from an original $10,000 FHOG that was paid last year into the home loan account.

    Therefore the $3,000 surplus funds has been 'technically' sitting as a repaymnet against the home loan during the stages of construction, come end of the build when i have confirmed invoices etc. leave a surplus of $3,000, i cancel my monthly direct debits to pay off the monthly interest charged.. So for 3 months I let interest totalling $3,000 ($1,000 per month) offset what could be notionally /theoretically viewed as prepaying the interest repayment required in advance?

    Do you think this would pass? or is this distinguishably different to interest of $1,000 being charged followed by an automatic same day debit - would the ATO view you as having paid off $3,000 of the loan, and as you mentioned capitalising an additional $3,000 interest. TO the bank, they would see the underlying net effects and reasoning however.

    The capitalised interest would therefore increase the loan to what it would have been had that $3,000 surplus funds never been deposited in. In this case would they not view the capitalised interest as 'property' related, and therefore once the property is rented - resulting interest payments deductible?

    >>There will be no deductions claimed during the first 5 years so no effect until you do claim the interest. Then you will only be able to claim the amount of interest associated with the loan used to purchase the property. This would be $290k assuming it was interest only

    >>A possible solution - a separate offset account.

    Would a posssible solution be having the bank pay supplier invoices post-construction directly from the loan? They have mentioned they could still pay invoices after progress payments are finished, and that if no loan was left this would come out of excess owner funds. In other words then I am directly paying the excess funds from the mortgage account. In essence it will be adding to the home loan total, but on the banks side they just view it as a reduction of excess funds that you could release. In this case would the interest, once the property becomes rented out in 2 or 3 years, still be viewed as the cost of 'purchasing/readying the property' - so therefore the $3000 surplus funds i instruct them to pay to a tradie to install a security system, would form part of my total home loan and the interest associated that will be deductible for tax purposes? So no difference to had the bank included this $3,000 for the security system and paid/lent as we went (so no surplus funds were ever contributed in advance)?


    Re: the seperate offset account - so you think having the surplus funds paid out to an unique, new account, and then withdrawing those funds out could prove a direct link to the invoices paid for work undertaken on the home, and therefore deductible? The only issue is to withdraw cash from the ATM to pay tradies , you'd have to transfer from the offset to a transaction account, then withdraw from an ATM. You'd have an underlying receipt that would equal the surplus funds in the offset account - but again will the ATO view the money as tainted as soon as it is transferred to a transaction account (for withdrawl) which involves private money transfers/uses that go through it? Even if it is transferred in and withdrawn out on the same day, with a corresponding invoice to show the money was then used for some sort of work carried out on the property?

    Seems like one big technical nightmare...