Finance Structure

[7DD4]

Hi guys

About to have a chat with my accountant about my finance structure, and wanted to share with Somersoft my ideas which I hope might help others.

The first diagram explains my current structure. All the rents get placed into an offset account which is linked with my PPOR, then when interest payments are due these are withdrawn from the same account.


The second diagram is my proposed structure. This shows again all the rents getting payed into the same offset account linked with my PPOR. The difference however I'm wanting for all the expenses and interest to be paid by the offset account linked to the investment accounts.

feedback appreciated

7DD4

 

[Terry_w]

Doens't make sense to me, but maybe I am reading it wrong.

Do you have cash in each offset attached to each investment property? If so why?

 

[7DD4]

Yep just refinanced the 4 properties.

Once I start drawing down the offset accounts the existing investment loans will increase.

Investment 1 max loan amount $499,000+55,400=$554,400
investment 2 max loan amount $376,000+24,000=$400,000
investment 3 max loan amount $392,000+104,000=$498,000
investment 4 max loan amount $333,500+58,000=$391,500

 

[pinkboy]

Is the cash in offset account, or is that a redraw amount when you refinanced?

pinkboy

 

[7DD4]

yep cash in the offset account.

Just made changes to the diagram

 

[Terry_w]

yep cash in the offset account.

Just made changes to the diagram

You mean you borrowed money and parked it in the offset? I don't like that for starters.

But lets assume you will be able to maintain deductibility. You seem to be proposing to use offfset money, i.e. Borrowings, to pay interest on the invesstment loans. If this is the case, what is the purpose of this?

Sounds like Part IVA could be applied.

 

[7DD4]

Yep will be waiting on advice with the interest on interest.

If this is going to be a problem can remove the interest back to my PPOR offset account. (see diagram)

My purpose behind this structure is to pay down my PPOR loan quicker, and to make the investment properties self supporting their own expenses.

This is only a proposed structure from my limited understanding.

How do other property investors structures differ from mine ?

 

[Terry_w]

I would say you run the risk of the ATO denying the deduction of interest on interest.

I recommend clients not drawn down and park into offset accounts, but to use a LOC. All incomes into an offset on the PPOR. Borrow to pay investment expenses. Utilise related party borrowings where possible.

 

[7DD4]

Thanks Terry

Would the diagram be correct ? (see attached)

Not to sure what you mean by Utilise related party borrowings where possible ?

 

[Terry_w]

Not sure about diagrams they are hard to interpret.

related party loans are loans from related parties, spouses and trusts. Can work well in certain circumstances for both asset protection and tax savings.

 

[7DD4]

looks like my drawings didn't help explain it very well.

Like a part in the Tom Hanks movie Philadelphia.
"Explain it to me like I'm a six-year old". Looks like i failed

 

[Nem]

I would say you run the risk of the ATO denying the deduction of interest on interest.

I recommend clients not drawn down and park into offset accounts, but to use a LOC. All incomes into an offset on the PPOR. Borrow to pay investment expenses. Utilise related party borrowings where possible.

Hi Terry, Can you please confirm if I understood correctly, all income (rent + salary) to offset to PPOR
Expenses (interest + other expenses) for IP 1 or more to borrow from the bank thru LOC?
So after a year, your offset would be increased and therefore PPOR interest payments lowered but loan for IP would be increased and interest deductible increased as well??
More money saved even when paying interest on that extra borrowed money because its deductible interest but at the same time paying less interest on your PPOR??
Did I understand it right??
Thank you

 

[Terry_w]

Hi Terry, Can you please confirm if I understood correctly, all income (rent + salary) to offset to PPOR
Expenses (interest + other expenses) for IP 1 or more to borrow from the bank thru LOC?
So after a year, your offset would be increased and therefore PPOR interest payments lowered but loan for IP would be increased and interest deductible increased as well??
More money saved even when paying interest on that extra borrowed money because its deductible interest but at the same time paying less interest on your PPOR??
Did I understand it right??
Thank you

No. That is not what i wrote above.

 

[ChrisA1]

Interesting thread to work through the details of setting up and using loans and accounts.


David, from what I have gleaned from your diagrams, the rents are deposited to the offset linked to the PPoR and the interest and expense payments are paid from this same account (the first diagram should possibly have the interest and expenses arrows going out of the diagram rather than pointing to the IP accounts as these payments are going to external parties - electricity, bank interest etc).

There could be many investors who use this structure where they pay all bills from one account (regardless of whether they are personal bills IP bills or other bills....), which is usually the offset to the PPoR, rather than having rents paid into each IP account and expenses paid from each IP account, and monitoring the IP account balances - esp for -vely geared IPs.

For your proposed structure, are you going to specifically pay all expenses from each IP offset (eg specify that all expenses for IP A come from IP A's offset account and so on). I am interested in how this works, especially with many IPs.


Terry, Part IVA is the anti-avoidance rule? https://www.ato.gov.au/General/Gen/Part-IVA--the-general-anti-avoidance-rule-for-income-tax/
How does a LoC (which I assume is against the PPoR with investment loans hanging from it?) alleviate this problem?

Borrow to pay expenses - would you be paying the expenses from a loan hanging from the PPoR or are you suggesting to pay each IPs expenses from that IPs offset account?

 

[Nem]

No. That is not what i wrote above.

ok so which part I didnt get it right? Expenses not to include interest payments or??
Thanks

 

[Terry_w]

ok so which part I didnt get it right? Expenses not to include interest payments or??
Thanks

its all in writing above!

 

[7DD4]

Hi ChrisA1

I have made changes to the diagram on what i propose to do, hope its more easy to understand now.

 

[ChrisA1]

Some posts that I found about LoCs that may help here:

http://somersoft.com/forums/showthread.php?p=1251383#post1251383
particularly post from Rolf Latham on 13-12-2014, 08:35 PM (for the borrow to pay investment expenses comment above)

http://somersoft.com/forums/showthread.php?t=103972

(this thread possibly has more relevance in the accounting and tax area - seems to be more around tax and loans).

 

[sanj]

its all in writing above!

Can you repeat pls?

 

[Terry_w]

I
Terry, Part IVA is the anti-avoidance rule? https://www.ato.gov.au/General/Gen/Part-IVA--the-general-anti-avoidance-rule-for-income-tax/
How does a LoC (which I assume is against the PPoR with investment loans hanging from it?) alleviate this problem?

Borrow to pay expenses - would you be paying the expenses from a loan hanging from the PPoR or are you suggesting to pay each IPs expenses from that IPs offset account?

Yes, Part IVA of the 1936 Tax Act.

Using a LOC won't change the effect of borrowing to pay interesst, but it will avoid the messy 'borrowing to park in an offset and to use later' bit.