Debt recycle non deductible to deductible

Hey guys have already spoken to professional sources but looking for some further advice to help fix a problem of mine moving forward,

I have 2 investment properties the first one had a redraw account initially where all cash saving was getting parked into for a period of time before realising this was not the best structure and it was then refinanced to I/O with offset. The second investment property was set up I/O with a offset account from day 1.

I am now looking into a method of debt recycling by setting up a new bank account for the purpose of paying investment related expenses only. I wish to transfer funds from the first investment property which once had a redraw account into this new account and then use this cash to pay investment property related expenses rates, bills ect... to help make my first investment loan 100% tax deductible again because the purpose of the redrawn funds was investment related.

Is this a correct way to help me fix my mistake of putting cash savings into a redraw account?

My last question is could I purchase a new investment property set up I/O with offset and use the above method to pay all associated bills including mortgage interest and at a later date make this new investment my PPOR by this stage the first loan will now be 100% tax deductible again?

Thanks your feedback will be greatly appreciated.

Regards.
 
I wouldn't be taking the funds out and parking them into an everyday account. Should be alright to take the funds out and pay the expenses direct.

Alternatively set up a LOC and then use that to pay the expenses.
 
Hey guys have already spoken to professional sources but looking for some further advice to help fix a problem of mine moving forward,

I have 2 investment properties the first one had a redraw account initially where all cash saving was getting parked into for a period of time before realising this was not the best structure and it was then refinanced to I/O with offset. The second investment property was set up I/O with a offset account from day 1.

I am now looking into a method of debt recycling by setting up a new bank account for the purpose of paying investment related expenses only. I wish to transfer funds from the first investment property which once had a redraw account into this new account and then use this cash to pay investment property related expenses rates, bills ect... to help make my first investment loan 100% tax deductible again because the purpose of the redrawn funds was investment related.

Is this a correct way to help me fix my mistake of putting cash savings into a redraw account?

My last question is could I purchase a new investment property set up I/O with offset and use the above method to pay all associated bills including mortgage interest and at a later date make this new investment my PPOR by this stage the first loan will now be 100% tax deductible again?

Thanks your feedback will be greatly appreciated.

Regards.

Your first question is vague. You cannot transfer money from a property. Do you mean from the loan? You want to borrow to pary the money in a savings account? = no deductible in my opinion.

Q2 = no
 
To be honest I have spoken to a couple of accountants and have received mixed feedback which has made me confused or they don't do face to face appointments only phone calls ect not what I am really after. I am located in Melbourne so if you could advise some one who could specifically help me with my situation that would be greatly appreciated, I just don't want to make anymore mistakes moving forward.

-Judging by what Brady said it would be best to set up a everyday offset account on my investment property which had a redraw account previously and use this to directly pay expenses ONLY associated to my investment properties over time slowly making this loan tax deductible again,

-If this works is it possible to purchase a new investment property and pay all bills associated with this in the same manner above to help fix the issue and move into the new IP later on in life.

Regards.
 
Terry re: putting borrowed funds into an interest bearing savings account and deductibility - what would be your thoughts on proceeds of a loan that are being used to fund an investment over several transactions?

i.e., someone borrows $50,000 using a conventional loan facility, has the proceeds paid to a savings account, $25,000 is invested straight away, the remaining $25,000 invested 6 months later. A LOC would be preferable obviously, but what would be the result of this situation?
 
Wait are you suggesting drawing funds from redraw and placing them into everyday offset account, I WOULD NOT recommend this.

Redrawing to pay for expenses yes, not to park the funds.

Drawing funds from LOC could be simple solution
 
Terry re: putting borrowed funds into an interest bearing savings account and deductibility - what would be your thoughts on proceeds of a loan that are being used to fund an investment over several transactions?

i.e., someone borrows $50,000 using a conventional loan facility, has the proceeds paid to a savings account, $25,000 is invested straight away, the remaining $25,000 invested 6 months later. A LOC would be preferable obviously, but what would be the result of this situation?

I would advise caution. Use a LOC to avoid doubt.
 
Hey Brady and thanks for the feedback from everyone,

I had a investment loan which had a redraw account where I was putting cash savings into, I have since refinanced and the loan now has a offset account instead of a redraw, to fix my mistake of putting cash funds previously into a redraw can I now directly take out cash from the offset to pay ONLY investment related bills directly. Over the course of time slowly makeing this loan 100% deductible again.

Thanks.
 
Hey Brady and thanks for the feedback from everyone,

I had a investment loan which had a redraw account where I was putting cash savings into, I have since refinanced and the loan now has a offset account instead of a redraw, to fix my mistake of putting cash funds previously into a redraw can I now directly take out cash from the offset to pay ONLY investment related bills directly. Over the course of time slowly makeing this loan 100% deductible again.

Thanks.

I would say seek tax advice.
 
Hey Brady and thanks for the feedback from everyone,

I had a investment loan which had a redraw account where I was putting cash savings into, I have since refinanced and the loan now has a offset account instead of a redraw, to fix my mistake of putting cash funds previously into a redraw can I now directly take out cash from the offset to pay ONLY investment related bills directly. Over the course of time slowly makeing this loan 100% deductible again.

Thanks.

Grey area as you have borrowed the funds and put them into everyday account.

I'm not a tax professional so not advise...

But I wouldn't recommend taking the funds out and parking them in the offset and using them that way. IMO you would be okay to redraw the funds put them into the offset then the same day pay the bill/expense from the offset... but not parking for an extended period.

IMO again you could possibly be okay if you were to park the funds in the offset, if that offset wasn't touched at all and only used to pay expenses. So no crediting the account. Just paying out expenses.


As mentioned a few times simple solution would be to put the funds back into the loan, cancel the redraw and create an LOC with the equity. Then use the LOC to pay all expenses. This would be very clear not grey :)
 
I think I haven't made my self clear,

I no longer have a redraw account when I rifinanced it was changed from a loan with a redraw to now a loan with a offset account only, I wish to pay investment releated bills directly from this offset account as the purpose is for investment releated expenses and slowly overtime making the whole loan tax deductible again. My cash savings which was once in a redraw was automatically parked in offset when loan was rifinanced.

Cheers.
 
You are not being extremely clear. You can withdraw money from an offset a/c but only the same proportion of the interest on the loan as s currently deductible remains deductible eg loan $100,000 interest on $10,000 of which is not deductible, $30,000 in offset. As a result of offset bank is in effect charging interest on $70,000 then the interest on $7,000 is not deductible. if you withdraw $10,000 for IP expenses, then bankis charging interest on $80,000 and the interest on $8,000 or 10 per cent is not deductible. The same applies if you withdraw $10,000 from the offset to buy a home theatre set up

You are not clear whether your loan has become mixed ie some used for investment purposes and some for other purposes or whether you want to increase the loan by withdrawing from the offset.

Get professional advice and be willing to pay for it
 
thanks for the help JRC,

I have never redrew money from this loan not once, I am a great saver :)

For example loan is 100,000 redraw is 100,000 after refinance loan is 120,000 offset is 120,000 and no money still has not been taken out YET.

my understanding is if I take out $2,000 from offset for a investment related bill I will be charged on interest on the $2,000 making this amount tax deductible, I will never take money out from this offset other for investment purposes making it very simple from a tax point of view.

I am in the process of getting advice but extra knowledge and help is extremely helpful also.

Thank you.
 
thanks for the help JRC,

I have never redrew money from this loan not once, I am a great saver :)

For example loan is 100,000 redraw is 100,000 after refinance loan is 120,000 offset is 120,000 and no money still has not been taken out YET.

my understanding is if I take out $2,000 from offset for a investment related bill I will be charged on interest on the $2,000 making this amount tax deductible, I will never take money out from this offset other for investment purposes making it very simple from a tax point of view.

I am in the process of getting advice but extra knowledge and help is extremely helpful also.

Thank you.

im not an accountant, but the above is pretty similar to the standard debt recycle strategy signed off by our planner and clients accountants every week...just dont capitalise interest if you have a PPOR debt.


ta
rolf
 
Hey Rolf,

Thanks for the help I actually got this debt recycling idea from this forum and have ran this though with my new accountant and he seems happy with this process...

just 2 questions if possible...
1) would interest amount related to a IP also work with above method as this is also a investment related expense?
2) I have been told what you just said "just don't capitalise interest if you have a PPOR debt" but to be honest I don't quite understand what you mean?

Thanks for your patience.
 
I think I haven't made my self clear,

I no longer have a redraw account when I rifinanced it was changed from a loan with a redraw to now a loan with a offset account only, I wish to pay investment releated bills directly from this offset account as the purpose is for investment releated expenses and slowly overtime making the whole loan tax deductible again. My cash savings which was once in a redraw was automatically parked in offset when loan was rifinanced.

Cheers.

Still as clear as mud.

Give us some figures.

Sounds like this to me:

$100,000 loan, you paid this down to $50,000 with $50k in redraw.

You refinance to $100,000, cancel redraw, but have $50k in offset instead?

If this is the case you have borrowed $50k to park in a savings account. This is not deductible in my opinion. So you now have a mixed purpose loan with only 50% of interest deductible.

There is an argument that the borrowed funds can be traced to the loan so the interest may be deductible. ATO seems to have agreed to this in one private ruling. But you can only use this as a guide.

However if any other non borrowed money has ever entered the savings account (offset) you have mixed deductible and non deductible and therefore you will have definitely destroyed deductibility of interest.

I suggest you seek specific tax advice and then fix your loan structure up by using a LOC.
 
Perhaps to make it easier/clearer on you/ your accountant and ATO going forward - for the loan you are intending to debt recycle - ask your bank to formally split the loan into 2 separate loans as a first step in the process:

So 1 loan of $100k becomes 2 loans $50k each.

Pay down one loan to zero, and now use funds for your income producing activities (and tax deductible interest).

Much cleaner than needing to keep tabs on with proportions of a single loan are deductible/non-deductible.
 
Perhaps to make it easier/clearer on you/ your accountant and ATO going forward - for the loan you are intending to debt recycle - ask your bank to formally split the loan into 2 separate loans as a first step in the process:

So 1 loan of $100k becomes 2 loans $50k each.

Pay down one loan to zero, and now use funds for your income producing activities (and tax deductible interest).

Much cleaner than needing to keep tabs on with proportions of a single loan are deductible/non-deductible.

This is actually a good strategy and one I have recently started recommending to clients.

Instead of one big loan for the PPOR, I suggest a few smaller ones which can then be paid down first and the funds accessed via redraw later on. Saves having to reapply for a LOC.

Have to be mindful of the number of splits allowed, sizes etc.
 
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