eligible loan amount in counting interest deducton on a contaminated LOC loan

[BeeP]

Hello, … I’ve just realized that I have a contaminated LOC loan on my PPOR… and I’m thinking about turning my PPOR into an IP. So how much is my eligible loan amount in calculating interest deduction?

Scenario,

1/1/08 LOC granted, with credit limit of $200K;
1/1/8-31/12/08 My parents loaned me total of $50K in to my LOC account (under the understanding that I have to repay when they need the money);
fortnightly Wage coming in, total amount of $100K
1/10/09 Taken out $20K to pay back my parents
1/1/8-1/4/10 I used LOC account to pay all my bills, including interest charged, total amount of $80K (they’re all used for private purpose)
1/04/10 Balance of LOC is $150K, and PPOR converted to IP.

I’m thinking of 2 answers,

a) $150K (LOC balance at the time PPOR turned into an IP)? or
b) $50K
(200K initial borrowing – 50K payment from parents – 100K wage deposit) (to my understanding of ATO’s ruling on deductibility on LOC loan, all payment considering as a payment to reduce principle, all amount taken out on private use is not eligible for interest deduction)

Next question,

If i hold/live in this PPOR for now,
1) take 30K out to repay my parents in full ASAP, so the LOC balance will increase to $180K,
2) then change LOC loan to an I/O loan (amount of $180K) with offset facility,
3) then a month or a few months later I turn the PPOR into IP.

Can I claim interest deduction based on a $180k loan now??


Thank you for any input!! Great place to learn!!

 

[marg4000]

What was the purpose in taking out the LOC?

Unless it was to pay part of your PPOR (or pay out an existing loan) then it will not be tax deductible at all.
Marg

 

[Mry]

Every time you make a deposit, the effective loan balance changes. Every time you make a withdrawal, the %s devoted to different purposes changes. You cannot collectively lump all of these figures together and try to surmise what you have to do to correct these mistakes. The loan balance and the purposes for the proceeds of the loan has to be tracked past each and every transaction that hits your bank statement.

It can be quite complicated.

 

[BeeP]

What was the purpose in taking out the LOC?

Unless it was to pay part of your PPOR (or pay out an existing loan) then it will not be tax deductible at all.
Marg

Hi Marg,

The LOC was taken out when i refinanced to purchase my 1st IP. The financial advisor knew i wanted to use some fund to trade shares, so he said "if u use part of fund in a LOC account rather than using ur own money (in ur offset account) to trade shares, the interest is tax deductable. And later on if u want to use more money on shares, u can access it without question, otherwise u need to apply a new loan each time.." That's why I turned my PPOR from a P&I loan with offset account into a LOC loan.

The fund for share trading is in a sub-account under the LOC, that should be fine. I just would like to know how much (loan amount) i can claim interst deduction if i turn my PPOR to an IP.

 

[BeeP]

Every time you make a deposit, the effective loan balance changes. Every time you make a withdrawal, the %s devoted to different purposes changes. You cannot collectively lump all of these figures together and try to surmise what you have to do to correct these mistakes. The loan balance and the purposes for the proceeds of the loan has to be tracked past each and every transaction that hits your bank statement.

It can be quite complicated.

Thanks, Mry. Now i see how complicated this can be... I guess it will give accountant a big headache and also cost me big $... That's why i was thinking whether change the loan from LOC to IO with offset account before i convert my PPOR to IP will simplify/get rid off this big headache...

When u say "...has to be tracked past..." do u mean they will track back to the begining of i get the LOC even if i changed it to an I/O loan??

Or maybe i'd better to sell it to a Trust, and get a clean start from there??