Are these funds contaminated?

[redsquash]

does this scenario violate any tax laws .
A simple yes or no is all I need because the scenario is pretty simple

I place my $10,000 savings in my Number 1 mortgage offset account.
I draw down $10,000 from NUMBER 2 mortgage and place funds in Number 1 mortgage offset account.


My only transaction is to immediately pay $1000 to my credit card company

Have I contaminated my funds thus affecting any calculation in claiming deductions for tax for interest payments? I am only referring to Mortgage number 2.

I dont think so.

 

[s_t]

If I understand you right, then yes, you have contaminated part of it. That is if the $1k came from #1 offset when its balance was $20k. Technically (at a purist level) only $9.5k of #2 is now tax deductible.

However, if you now pull $10k out of #1 (as soon as possible) and use it for investment, I'd be arguing on 'intent' (that #1 was just a temporary place for transaction purposes) and probably claim the lot anyway.

I'm not an accountant.

does this scenario violate any tax laws .
A simple yes or no is all I need because the scenario is pretty simple

I place my $10,000 savings in my Number 1 mortgage offset account.
I draw down $10,000 from NUMBER 2 mortgage and place funds in Number 1 mortgage offset account.


My only transaction is to immediately pay $1000 to my credit card company

Have I contaminated my funds thus affecting any calculation in claiming deductions for tax for interest payments? I am only referring to Mortgage number 2.

I dont think so.

 

[agent007]

does this scenario violate any tax laws .
A simple yes or no is all I need because the scenario is pretty simple

I place my $10,000 savings in my Number 1 mortgage offset account.
I draw down $10,000 from NUMBER 2 mortgage and place funds in Number 1 mortgage offset account.


My only transaction is to immediately pay $1000 to my credit card company

Have I contaminated my funds thus affecting any calculation in claiming deductions for tax for interest payments? I am only referring to Mortgage number 2.

I dont think so.

Assuming that your Number 1mortgage account is against an income producing asset, I'd say no however, I'm not accountant. You haven't done any thing wrong. Nonetheless, it is highly recommended not to mix investment and personal expenditures. If this is a 1 off issue, it should be easy to record but, many of these type of transaction would be messy and won't impress the ATO in case you get audited.

Hope this helps.

James

 

[Rob G.]

More information please ...

Are both loans for income purposes ?

What was the credit card payment for ?

Cheers,

Rob

 

[Boyler_Room]

More information please ...

Are both loans for income purposes ?

What was the credit card payment for ?

Cheers,

Rob

I was going to ask a similar question.

Redsquash, while it may appear simple to you, there is actually very important information missing from your question.

In saying that, I would recommend not mixing loans as described, particularly if Loan 1 is personal debt (eg PPOR) and Loan 2 is for investment. Doing this would be contamination, although simply paying the amount back into Loan 2 and then redrawing it for investment purposes would rectify the issue.

Your initial drawdown of $10,000 parked in Loan 1 Offset would most likely be considered non-deductible, but I recommend consulting your accountant if you're thinking about going down this road.

Cheers
BR

 

[redsquash]

More information please ...

Are both loans for income purposes ?

What was the credit card payment for ?

Cheers,

Rob

Both mortgages are for investment properties .
I have no personal debt apart from credit card.
Credit card is mainly personal debt but in this instance it was 80% for an investment property.

The figures are example to keep things simple.

I usually never mix investment debt with personal debt
.
However i had an emergency with my Investment property and was forced to use my credit card for immediate payment.

This will happen again next month as the emergency payment was quite large.

When I do a redraw I cant pay anybody directly so I first have to put it into an offset account, or savings account.
The offset account is reducing my mortgage more, so thats where it goes

I might put $50k into the account from a redraw and the very same day pay a builder 50k ie 5 minutes later.
If I had 10k sitting in the offset account I am assuming common sense would prevail and it would seem I am not contaminating funds. it is easy to track the money.

Would it make any difference if the IP debt payment was made with the exact amount and the personal debt was made separately with the exact amount. at least the items would seem to match up with each other.

I assume if all the funds in an offset are just savings in an offset account then there is no contamination by paying a credit card that has , for example , 50% personal debt and 50 % investment debt.

 

[BV]

redsquash

I believe that you are contaminating the redraw amount
and as you use it you will be losing more and more of it's tax deductibility.
If you use all $10K and even if you pay it back then IMO
you will no longer be able to claim the interest on the $10K you've redrawn.

If your offset balance drops below $10K for 1 day or more then some of the interest on IP2 will be non deductible so it will be a nightmare for your accountant to separate it.

Even if you don't use the money in the offset at all you are still mixing up IP expenses which the ATO won't like to see.

Placing the money into the offset is like putting it into a savings account
earning you interest but because the offset is linked to another IP your accountant would like to see the interest paid for IP2, paid back from the interest saved in mortgage 1.

This is because expenses for each IP are declared separately on your tax return.

Cheers

 

[Bill.L]

Hi all,

I agree with boyler, see a good accountant about this.

My understanding however, is that when you borrow you have a purpose for that money. If the purpose was for investment, then yes the interest is deductible.

Your purpose for taking the money appears to be to put it into an offset account. That is not an investment. Therefore no deduction.

You have not contaminated anything, it is just not deductible.

bye

 

[Rob G.]

As per Boyler Room ...

Do not pay ANY money into the offset account until you have separated the funds.

i.e. either withdraw the $10,000 of original loan money from mortgage #2 and perhaps pay down that original debt or put in another 100% offset account linked to an investment loan or alternatively just withdraw your remaining $9000 savings and park it somewhere else.

Argue the refinancing principle from TR 2000/2 para 18.

Don't mix it again ... it completely defeats the purpose of using offset accounts.

Cheers,

Rob

 

[redsquash]

I was going to ask a similar question.

Redsquash, while it may appear simple to you, there is actually very important information missing from your question.

In saying that, I would recommend not mixing loans as described, particularly if Loan 1 is personal debt (eg PPOR) and Loan 2 is for investment. Doing this would be contamination, although simply paying the amount back into Loan 2 and then redrawing it for investment purposes would rectify the issue.

Your initial drawdown of $10,000 parked in Loan 1 Offset would most likely be considered non-deductible, but I recommend consulting your accountant if you're thinking about going down this road.

Cheers
BR

There is no personal debt in the loans mentioned.
Does your answer now change?

robg
I havent fully understood your answer but i am working on it.
You post number 17 in another recent thread tonight/? made me think I was ok in my actions.
When I understand everything i will approach an accountant but I need to get these issues clearly sorted.
Rob G
Pat in th esame thread quoted a taxation determination and I thought the matter was ended.

why is my cas e different

 

[Rob G.]

There is no personal debt in the loans mentioned.
Does your answer now change?

NO

robg
I havent fully understood your answer but i am working on it.
You post number 17 in another recent thread tonight/? made me think I was ok in my actions.
When I understand everything i will approach an accountant but I need to get these issues clearly sorted.
Rob G
Pat in th esame thread quoted a taxation determination and I thought the matter was ended.

why is my cas e different

That thread discussed whether parking money in a linked offset account and subsequently withdrawing was a pay down and redraw of the loan principle - No its not generally.

Therefore parking money in an offset account is not mixing funds with the linked account (normally).

You have done something quite different - you have mixed funds in your offset account.

Cheers,

Rob

 

[s_t]

In other words the no 1 mortgage itself has nothing to do with it.

A simple yes or no is all I need because the scenario is pretty simple

yah reckon?

 

[Bill.L]

Hi Redsquash,

This is the important bit....

I draw down $10,000 from NUMBER 2 mortgage

What was the purpose of the withdrawal?? If the purpose was investment, the interest is deductible. Just placing the money in an offset account is not an investment, therefore the interest on mortgage 2 is NOT deductible.

Reason... The offset account does not pay interest, it is not an investment.

The mortgage interest on 1 remains deductible, except that you are paying less interest because you have more money sitting in the offset account.

bye