Interest Deductibility

[traveller]

Hi,

The question I have relates to apportioning the deductible and non-deductible interest in the loan.

I have a PPOR loan for 190K and have 50K in the MISA account with CBA. I actually want to use this 50K as a deposit for my Margin Loan and buy some shares. What I wanted to know is that will interest for this 50K tax deductible?

Also throughout the year my salary will be coming into this PPOR loan MISA account. What I want is that these further deposits should go against paying the non-deductible portion and not the 50K which I used for the deposit to buy shares. So by the year end, my tax-deductible 50K remains as it is whereas the non-deductible loan slowly diminishes.

There is no split in the loan and the reason I don’t want to refinance or do anything else with this loan because I got a very good deal for this loan in terms of interest rate at 7.2% no fees. If I refinance or split the loan then I will be back on 7.5% with $300p.a fees.

Any ideas/opinion will be greatly appreciated.

Thanks -

 

[The Y-man]

Shouldn't be a problem from what I understand of it.....

Just keep a good track of what went out and came in.

Cheers,

The Y-man

 

[pulse]

The MISA is not a loan and therefore you don't get charged any interest. It offsets the amount of your loan to reduce your interest bill. It is really just a carpark for spare cash.

If you used this money as a deposit then the only interest that is deductible is the interest on your margin loan. Eg 150K loan, 50K deposit means 100K loan with the interest on 100K deductible.

However if you can use you PPOR as security for the full 150K loan then the interest on 150K is deductible.

Hope that all makes sense

Cheers
Pulse

 

[traveller]

Thanks pulse and Y-Man...But i get conflicting message here.

Pulse, you are saying that MISA is not a loan and from that angle 50K withdrawn from it will NOT be tax deductible. But this is not my understanding.

I thought as MISA has the the effect of the offsetting the Loan interest then any increase in the Interest liability should be tax deductible if withdrawn for income yielding investment.

I was trying to clarify this from the ATO website but couldnt exactly find the relevant info. Is this a grey area and it's advisable to take a private binding ruling from ATO?

thanks again-

 

[Ol School Skata]

I don't think you can make payments into your MISA account and wish to distinguish that this is only going to repay the PPOR part of your loan. Unless your loan is split, I am sure the ATO would view any principal repayments would reduce the loan balance in proportion to you non deduct/deduct parts of your loan.

Best to establish a separate loan for your share funds ($50K) and concentrate all your repayments into the PPOR loan.

OSS

 

[pulse]

I see your point now... interesting question. The way I see it the MISA is an offset account. It is your money, it is not a loan. Therefore if you spend it on a tax dectuctible investment there is no deductible interest. The only interest is on your original loan which is for your PPOR.

You can only claim interest on amounts borrowed for investment, withdrawing from you MISA is simply spending money you already have, there is nothing to claim. I'm sure you could structure a new margin loan that would be deductible though.

Cheers
Pulse

 

[TheInvestor]

I have a CBA MISA a/c and it does not act line a LOC a/c.

If you wanted to use funds from that a/c you would not be charged interest.

However, it makes sense to try and make some of the interest component on your PPOR deductible.

If you wanted to use the 50k from the MISA for investment purposes, consider paying the 50k into your PPOR mortage (which creates 50k equity) and then draw the 50k back out for investment.

This way you still have the same debt, however a portion of your interest on your PPOR is now deductible.

 

[traveller]

Thanks all for replying....

Pulse/Investor - Your replies are contrary to what my understanding was wrt to withdrawing money from MISA for investment purposes and claiming that the increased interest as tax deduction. .

I think its time to go for a Private Binding Ruling. Has anybody taken a PBR from ATO for this or received any specific direction from his/her accountant?

All opnions welcome thanks.

 

[The Y-man]

Shouldn't be a problem from what I understand of it.....

Just keep a good track of what went out and came in.

Cheers,

The Y-man

Sorry! My bad.

You can not "redraw" from an offest account.

It must demonstrably go into the homeloan account, and then be redrawn from the principle.

Apologies for the confusion.

Cheers,

The Y-man

 

[reidy75]

Save your time

No need to worry about a private binding ruling, the answer will be no.

As has already been said, you need to look at what the borrowed money is used for.

In your case, you have borrowed an amount of money for your PPOR. Attached to this loan is an offset account, and any money deposited in that account doesn't earn interest but reduces the interest charged on the PPOR loan.

Pulling money out of the MISA account will result in higher interest due to no offset, but it isn't actually a borrowing.

The money originally borrowed for the PPOR is still owing and relates to the PPOR, you just have a lower offset against it.

The only option is to set up a separate loan, which then allows you to keep all repayments going to the PPOR loan (or offset a/c).

Even if you repay the $50K against the loan and do a redraw so that the $50K has been borrowed for investment purposes, if its within the one loan all repayments are apportioned between the two purposes.

So if you want an interest deduction on the $50K, you'd need to decide whether the increased interest rate and fees are more than the benefit of the tax deduction!

 

[traveller]

Thanks All.

One more question - Since it’s advisable to separate the two loans, is it ok if i just go for a split in the loan. That is,

Current Scenario:

PPOR Loan = 195K
MISA = 55K

Proposed:
Split the PPOR Loan into two such that:
Split 1 = 140K, MISA = 0K
Split 2 = 55K

This money from the Split 2, that is 55K, I can then use for buying the shares. All this is from CBA.

Thanks again....

 

[Peter_Tersteeg]

As previously pointed out, the original loan was for personal use, so pulling money out of your MISA account won't give you any tax deductions, regardless of the use of that money, because the interest is on a loan for a non income producing asset.

Whilst it's a bit involved, you could pay the money from your MISA account directly onto the loan, then reduce the limit. This is a simple way of generating equity in the property.

You then open up a separate loan, such as an LOC against this equity. If you draw on this for investment purposes, the interest charged should be deductible for most circumstances.

The reasoning behind this is that now the two loans have a clear definition of what their use is. One is for personal use (non deductible), the other is for investment use in an income producing asset (deductible).

 

[Mrman]

You must also remember that a condition of the MISA Account is that you have a minimum of $1000 in it at all times

 

[Dis]

Can anyone clarify how user friendly the MISA account is? I couldnt get a clear idea from my broker. Can you schedule automatic payments from it (CC, bills, loan payments) or do you have to transfer money into a savings account and do all the electronic banking from there?

 

[traveller]

Yes, that should not be a rpoblem Mrman. Thanks

Dis, I am not sure if we can schedule payments from MISA. I usually just transfer it to my Streamline account and do it from there....

 

[ermen]

sorry to hijack this thread... but whille we're at it i'm just wondering if this situation is tax deductible?

I borrow 20K personal loan to fund some part of the purchase costs which was paid into solicitor's trust account.

Solicitor uses 13k to pay stamp duty, 3k for legal leaving a surplus of 4k.

I paid Paid 17k deposit to real estate agent as deposit.

On settlement, solicitor refunds me 4k.

Is my 20k perosnal loan still tax deductible?