Help! Messy structure after equity release

[srini]

Hi all,


I have just had some equity released.

The loan originally was $180k. ANZ has released $50k of equity.

The way they’ve done that, they’ve deposited $50k into our everyday (full offset) account and increased the loan balance to $230k

We intended to use $20k of the $50k for non-deductible purposes (landscaping new PPoR) and use the rest as a deposit for a small IP.

But because of the way they’ve done it, looks to me like this structure is very messy to keep track of deductible debt at tax time.

Would appreciate any ideas on how to structure it better so I am not having to apportion interest at tax time.


Thanks
Srini

 

[Aaron_C]

The only way that ANZ could have made it extra-squeaky-clean is to split your account into 2 more accounts - one with the $20,000 (for PPoR) and another with $30,000 (for IP deposit). But if you keep sufficient records it won't be such a big deal in all honesty

 

[Rolf Latham]

Hi SR

IS the loan IO ?

ta

rolf

 

[Terryw]

It does look messy.

There are 2 issues here:
1. The deductibility of the interest on the $50,00.
The borrowed funds have been placed into a savings account so they are no longer borrowed funds. Technically the interest wouldn't be deductible now, but I am not sure the ATO would play such a hard line.

You should not put any other non borrowed funds into this savings account.

2. The splitting of the interest if point 1 is overcome.
This would be easy if the loan is IO as each portion would be easily worked out. if 20k is used for PPOR then 40% of the interest would be deductible.

But the problem with this will be that it is impossible to pay down the $20,000 before paying off the investment portion because it is one big account.

 

[alexlee]

The loan docs should have included a form that stated where you wanted the excess funds to go to. What did you write on that form?

 

[srini]

Hi Rolf,Fortunately, all our loans as IO.

Terryw, agree that because the funds have been placed in the offset account, the interest on $50k is no longer deductible.

What records should I keep to make life easier come tax time?

I am thinking:
1. Spreadsheet of transactions that are tax deductible for each calendar month (along with receipts)
2. Record of all loan statements received and interests paid

Anything else?

 

[Terryw]

I think just the usual records showing the total amount of interest paid.

Then, since your loan is IO it should be easy to work out as a percentage the amount that is deductible.

eg. Total loan $280,000 with $230,000 deductible = 230,000/280,000 = x%

x% would be the total amount of the interest deductible.

(but check this with your accountant)

 

[srini]

Thanks Terryw.

Just one more question.

Can I release $50k equity from an IP loan which is fixed at 6.2% and park it in my variable PPoR loan @ 6.8% without any tax implications?

 

[alexlee]

Thanks Terryw.

Just one more question.

Can I release $50k equity from an IP loan which is fixed at 6.2% and park it in my variable PPoR loan @ 6.8% without any tax implications?

No. The purpose of the 50k would be to pay off a non-deductible loan, making the interest on the 50k non-deductible.

If it's going to a PPOR offset, it's almost certain contamination. Especially if you have other funds in the PPOR offset and/or the PPOR loan payment is coming from the PPOR offset.

Seriously, can people either map out these things with an accountant first, or just stop doing all these 'clever' transactions?

 

[Terryw]

No. The purpose of the 50k would be to pay off a non-deductible loan, making the interest on the 50k non-deductible.

If it's going to a PPOR offset, it's almost certain contamination. Especially if you have other funds in the PPOR offset and/or the PPOR loan payment is coming from the PPOR offset.

Seriously, can people either map out these things with an accountant first, or just stop doing all these 'clever' transactions?

I agree...

 

[Peter_Tersteeg]

It happens way too often that funds go to the wrong account immediately after settlement. There's any number of triggers and it's a pain in the neck.

The usual way to deal with it is to simply transfer the funds to the appropriate places as soon as possible. It's not perfect or fool proof, but if you do it as soon as internet banking is working it does show the right intentions. I've never had a client get in trouble with the ATO over this and there is a reasonable paper trail to support the intent.

As for having the right splits in place, this really is something that should have been done properly right from the start. Get your banker or broker to fix it immediately, but if it's been lingering for a while I'd say the horse has bolted.

 

[srini]

Thanks Terryw.

Just one more question.

Can I release $50k equity from an IP loan which is fixed at 6.2% and park it in my variable PPoR loan @ 6.8% without any tax implications?

Just to clarify, I do not intend to claim the interest on $50k as a deduction.

I understand it is now tainted money and I have to keep meticulous records of any investment related spend from the $50k.

 

[Peter_Tersteeg]

Sirini you can't release equity as an extension of an existing fixed loan. You'll either need to:

* break the fixed loan (in which case you won't be paying 6.2% on the entire amount)
- or -
* set up a supplimentry loan (which would be at a different rate anyway).

A fixed loan is essentially a legal contract to fix a specific amount of money at a specific interest rate for a specific amount of time. Any variation to this would break that contract.

 

[srini]

Hi PT_Bear,

To give you some background, I have 3 IPs and 1 PPoR all were IO on variable rate of 6.8% till last Friday.

I asked to release equity of $50k from IP#1 and fix all 3 IPs for 2 years @ 6.2% (ANZ)

They did that, but transferred the funds to the PPoR full offset account.

I understand that this $50k is now tainted and not deductible. I'll keep records of any deductible expenses and claim only that portion of the interest.

So far so good (I think). The question I had was:
The $50k is sitting in our PPoR offset account offsetting a $500k loan at 6.8%, but bank charges 6.2% of the $50k. Is this ok?

I understand that the interest on $50k is not deductible.

Thanks for all the help and patience.

 

[Peter_Tersteeg]

What you've described isn't really how I'd have done it, but it can work. You're right, you just can't claim the interest on the $50k. If you don't claim interest on $50k I'd expect you'll be fine for the moment.

The problem you could run into in the future is what happens if you start to pay down the overall loan at some point in the future (perhaps after you've paid down the loan on you PPOR)? If you pay off $10, how much of that is paying on the deductable and non-deductable portions? I suspect you'll need to split the difference the same way you split the interest.

It's too late to change it now (but you could fix it after the fixed rate expires), but what might have been better is to have set up two fixed loans, one being $50k of non-deductable debt. This would have been much cleaner than a single account. If you want to pay down debt later, it's clear what you're paying down.

You can split the loans in two, but not whilst they're fixed. I'd wait until the fixed rate expires, then split $50k into a second account and continue to treat that part as non-deductable.

 

[srini]

What you've described isn't really how I'd have done it, but it can work. You're right, you just can't claim the interest on the $50k. If you don't claim interest on $50k I'd expect you'll be fine for the moment.

The problem you could run into in the future is what happens if you start to pay down the overall loan at some point in the future (perhaps after you've paid down the loan on you PPOR)? If you pay off $10, how much of that is paying on the deductable and non-deductable portions? I suspect you'll need to split the difference the same way you split the interest.

It's too late to change it now (but you could fix it after the fixed rate expires), but what might have been better is to have set up two fixed loans, one being $50k of non-deductable debt. This would have been much cleaner than a single account. If you want to pay down debt later, it's clear what you're paying down.

You can split the loans in two, but not whilst they're fixed. I'd wait until the fixed rate expires, then split $50k into a second account and continue to treat that part as non-deductable.

Makes sense to me now. Thanks a lot.