Curious if this works

Discussion in 'Property Finance' started by Bandita, 5th Sep, 2014.

  1. Bandita

    Bandita Member

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    Something 2 different bank managers have mentioned to me - I'm unsure tax wise if this would work. It's not the way we'd go anyways as the payments are too high, but I'm curious if we could legitimately claim this interest on the investment loans......

    Looking for a loan to buy into our business (can't use business as security)

    As an example, have

    1 x IP value $500k, loan $250k
    1 x PPOR value $500k, loan $250k
    LVR 50%

    There is $500k equity with both properties. Bank is willing to loan upto 100%LVR of properties based on business financials. Ignoring the x-collateral issue, for a business loan, if bank was to give you a $500k business loan, secured against both properties,

    Day1 would be this:
    1 x IP value $500k, loan $250k
    1 x PPOR value $500k, loan $250k
    Business loan: $500k
    LVR 100%

    Bank is saying over 3yrs they need the LVR to be back down to 80%, so they suggest paying huge payments ($9k per month) against PPOR, leaving business loan ($500k) as interest only.

    3yrs later (assuming no change in property values)
    1 x IP value $500k, loan $250k
    1 x PPOR value $500k, loan $50k
    Business loan: $500k
    LVR 80%


    If the additional money you're using to pay off that PPOR debt comes entirely from the income you're getting from the business (via new business loan), is this legit tax wise?
    I assumed we'd have to pay business loan down over 3 yrs, but bank managers are saying best to pay off your non tax-deductible debt first (PPOR). As I said, ignoring the x-coll issues, I'm more curious if we'd have any issues tax wise with claiming the interest on the loans? We'd obviously be claiming the business income as income, and paying tax on that, does it matter that it all went to paying off PPOR debt?

    Thanks :)
     
  2. Aaron_C

    Aaron_C Finance Broker

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    Why is it an issue? The income you get from your business can be used however you see fit...

    You will find though that the bank would normally insist on the business loan to be paid down much more quickly so over a 5-10 year term so you won't have much cashflow in reality to pay down the PPOR debt.
     
  3. Bandita

    Bandita Member

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    Thanks, I don't know know why I can't get my head around it - as I was typing it out I realised it made quite abit of sense but when I first heard it I was thinking "no way, that might seem like tax evasion!" Typing it all out though, it does make more sense. Thanks for making me realise that :)

    The repayments would make the business loan pointless in our situation though, way too high, but I wanted to make sure the ideals behind it were OK before I went back with any questions.

    Thanks :)