Finance & Loan Structure Strategies

[stumpie]

Hi all

I'm fairly new on SS and have benefited very much on reading the various threads on here on so many topics that are relevant at different stages of my journey. Just want to say a big thank you to the owners of the forum and the regular contributors on SS for not only sharing their knowledge but also their time and mentorship to the newbies like myself.

I have a few questions below which I hope could be answered by the tax accountants, lawyers & mortgage brokers on SS and I'm sure it will help enlighten myself and others with your valued comments.

1. Capitalising Interest

I've read through the thread 'Interest on interest' by Corsa which from memory was first posted in 2006 and note that since then laws have changed and the general consensus is to get a private ruling on one's specific circumstances. Would this be correct?

Scenario 1:

PPOR loan 300K

IP loan 300K (standalone & not cross collaterised)

LOC 100K

PPOR offset A/C

Property Transaction A/C

Credit Card (only for IP)

If one used a strategy of putting all rental income and salary into the PPOR offset and using the Property Transaction A/C or Credit Card to pay for all IP interest and expenses and the Property Transaction A/C and Credit Card gets its source of funds from the LOC. My understanding is the ATO will apply Part IVA for this structure and deny the deduction for capitalising interest?

Scenario 2:

PPOR loan 300K

IP loan 300K (standalone & not cross collaterised)

LOC 100K

PPOR offset A/C

Property Transaction A/C

Credit Card (only for IP)

All salary income gets deposited into the PPOR offset and rental income is deposited into the Property Transaction A/C and any IP interest & expenses is paid out of this account and any shortfall is funded and sourced from the LOC. My understanding is that the ATO is less likely to apply Part IVA, would this be correct?

2. Loan structure & the mechanics of paying IP expenses

I'm guilty of paying for IP expenses using my personal credit card due to my ignorance only to find out later it is not possible to be reimbursed from an LOC or Loan A/C so for the benefit or myself and others below are some possible scenarios I hope the more qualified SS members could provide some guidance on.

If one is able to release equity from an IP into another variable loan sub account so for example;

IP loan 1 300K - fully drawn
IP loan 2 100K - not fully drawn
Offset A/C - no contamination purely IP usage

If the funds are transferred from Loan Account 2 to the offset and if one pays a deposit to the RE trust account from this offset acct for another IP the link to the loan is lost and hence the deductibility of interest could potentially be denied, is this correct?

Is it also true that if a bank cheque for part of the 20% deposit for settlement of an IP is made out to the Solicitor or conveyancer's trust account that the link between the loan account i.e. in this case Loan account 2 is now lost as well to the income producing asset?

If a credit card was used to pay for IP expenses and at the end of the month the CC is paid using the funds from the IP offset account would the interest expense on Loan Account 2 be deductible? Should the payment of the CC be made directly from the Loan A/C instead?

Should one pay for IP deposits, expenses and interest directly from the Loan A/C or can it be done from uncontaminated offset accounts like in the above setup?


I am sure the above questions will help me and others new to the game be better educated.

Cheers
Stumpie

 

[Terry_w]

Hi Stumpie

Couple of points

1. A payment made on a credit card is a loan - on credit. This mini loan can be refinanced with another loan - such as a LOC

2. Parking money into an offset account is not ideal. Use a LOC initially.

Scenario 1 = capitalising interest. Just as likely to fall foul of art IVA as direct capitalisng I think.

Not true about the transfer to the trust account.

 

[stumpie]

Hi Stumpie

Couple of points

1. A payment made on a credit card is a loan - on credit. This mini loan can be refinanced with another loan - such as a LOC

2. Parking money into an offset account is not ideal. Use a LOC initially.

Terry, what if the loan product does not have an LOC but just an offset? would you suggest to leave the funds in the loan and simply use the redraw facility?

Scenario 1 = capitalising interest. Just as likely to fall foul of art IVA as direct capitalisng I think.

Yep as per what I wrote but what about scenario 2 where an attempt is being made to utilise the rental income to fund some of the cost & expenses of the IP but any shortfall is funded by using the funds from the LOC?

Not true about the transfer to the trust account.

 

[Terry_w]

Terry, what if the loan product does not have an LOC but just an offset? would you suggest to leave the funds in the loan and simply use the redraw facility?



Yep as per what I wrote but what about scenario 2 where an attempt is being made to utilise the rental income to fund some of the cost & expenses of the IP but any shortfall is funded by using the funds from the LOC?

If not LOC you could use redraw as long as you can pay direct from the loan account without temporarily parking

Scenario 2 would be more promising, but what is the dominant purpose in setting this up like this? Artificially increasing dedductions to pay off the home loan sooner.

 

[s0805]

If not LOC you could use redraw as long as you can pay direct from the loan account without temporarily parking

If you are going to do this...check with your lender first. I'll b surprised if lender could allow you to write a cheque from redraw account without parking the money anywhere....

Terry, any lenders you've come across who allows this directly from redraw?

 

[Terry_w]

If you are going to do this...check with your lender first. I'll b surprised if lender could allow you to write a cheque from redraw account without parking the money anywhere....

Terry, any lenders you've come across who allows this directly from redraw?

Macquarie is one.

 

[stumpie]

If not LOC you could use redraw as long as you can pay direct from the loan account without temporarily parking

Scenario 2 would be more promising, but what is the dominant purpose in setting this up like this? Artificially increasing dedductions to pay off the home loan sooner.

hi Terry I've got Bankwest and Homeside loan accounts which i can directly pay out from i.e. make a transfer to a payee from the loan account.

in respect to scenario 2, i think it is a typical setup where one puts rental income into a transaction acct and pays interest and expenses out of this acct the only difference here is IF there is a shortfall and lets assume the IP is negatively geared than one would rather fund the shortfall from debt being from the LOC rather than top it up from salary. m yardney and r balanda et al in their books have described this setup. so i suppose the dominant purpose is buying time that in the future that IP will be positively geared.

 

[stumpie]

Just on the issue with offset accounts, my experiences so far is that if one were to refinance an IP and release some equity the funds would normally have to be deposited into the offset. Is this your understanding? so that the funds are drawn down.

And then the approach is to put nearly all back into the loan account but not all just in case the lender thinks its paid back. is this your approach?

I think an LOC is much easier to manage but my broker is conservative about having too many LOCs just in case the lender turns this off due to policy changes.

 

[Terry_w]

Just on the issue with offset accounts, my experiences so far is that if one were to refinance an IP and release some equity the funds would normally have to be deposited into the offset. Is this your understanding? so that the funds are drawn down.

And then the approach is to put nearly all back into the loan account but not all just in case the lender thinks its paid back. is this your approach?

I think an LOC is much easier to manage but my broker is conservative about having too many LOCs just in case the lender turns this off due to policy changes.

My approach is to advise clients to use a LOC. Where this is not practical then a new offset with no other funds could be used and then a deposit back into the loan. If it is an incraese then putting it all back won't close the loan but if it is a new split then this is an issue.

Some lender don't allow drawn funds to be placed into the loan account at settlement -ANZ and Homeside in the past..