legitimate tax strategy?

A

Anonymous

Guest
From: Anonymous


hello all,

Can anyone tell me if the following would be legitimate?

I am currently paying off my PPOR. The title is in the name of myself AND my wife. The mortgage is also in both names. We would like to upgrade to a new and bigger PPOR in a few years.

Let's say we changed the title on our PPOR to be in my wife's name only. Then, in a few years when we want to buy a new PPOR, my wife "sells" our current home to me. I take out a loan to cover this, and we turn our current home into an investment property. That way the loan is tax deductible. However, the money I have "paid" to my wife to buy the property from her is actually used as a deposit for our new home.

Is this OK? Or would it be too obvious to the ATO that we changed the title on our current home just to "keep things in the family" and gain a tax advantage from money that in reality is being used as a deposit for our new PPOR.

I hope this makes sense?

Cheers

Anon
 
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Sim

Administrator
Reply: 1
From: Sim' Hampel


Why not just convert your currrent PPOR loan to an IO loan with an offset account. Keep putting in the money you would normally pay on mortgage repayments into the offset account (plus any extra spare you have), which will reduce interest payable in the short term.

Then when you move out, you use that money you have saved in the offset account as the deposit on your new PPOR, leaving an IO loan for the IP with all interest tax deductible from that point.

May not maximise your tax deductions as much, but it will save you a fortune in stamp duty and possibly a nasty audit.

Get some advice from your accountant either way.

 
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A

Anonymous

Guest
Reply: 1.1
From: Anonymous


Hi Sim,

Thanks for the advice. I hadn't thought of that, all though I must admit I don't really understand why money redrawn from an offset account is different from money redrawn from a home loan with a redraw facility. I mean, I've read on this site several people saying it is, but I still don't get it.

If I convert the loan into an IO loan with an offset account, and say I pay the loan down to $20k or so. If I redraw say $100k from the offset account for a deposit for my new PPOR, is the $120k owing on my first home now tax deductible?

Cheers

Anon
 
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Sim

Administrator
Reply: 1.1.1
From: Sim' Hampel


On 6/7/02 8:38:00 AM, Anonymous wrote:
>
>I must admit I don't
>really understand why money
>redrawn from an offset account
>is different from money
>redrawn from a home loan with
>a redraw facility.

It's all about the purpose of the funds.

A loan is used to purchase a property, that is the purpose of the funds.

If you pay off some of that loan and then redraw money out again (increasing the amount of the loan) then that extra bit of loan from the redraw has it's own "purpose". If you use it to pay for the deposit on another PPOR, then it is private use of the funds and the interest is not tax deductible.

This starts to get tricky to account for at tax time, as it is still one pool of borrowed funds, but some of it is for private use and some of it for an IP. In this simple case, it is actually not too difficult to work out how much is IP interest and how much is private interest, but if you do multiple transactions continually depositing and withdrawing money from that loan account it becomes very diffcult to work out IP interest accurately.

With an offset account, you have two pools of money. The loan, and a savings account. The idea is that the loan is used for one purpose and one purpose only - to provide funds for a property. No redraws to confuse the purpose of the loan.

The other account is a savings account, which you place money into rather than paying extra off the loan. You get the same nett effect in either situation from an interest saving point of view. However, when you go to redraw some money, taking it out of the offset account in no way changes the loan account or the purpose of the money in there. Keeps things nice and simple for the ATO.

These things are best explained visually, go see an independent mortgage broker and have them explain it all to you. Alternatively, come to a Freestylers meeting in Sydney and I'll do a whiteboard session for you ;-)

Speaking of which... I should ring Freestylers HQ and ask that there be several large whiteboards supplied for the Big BBQ !!

 
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A

Anonymous

Guest
Reply: 1.1.1.1
From: Anonymous


Wow. Thanks Sim. You've explained that very well. I'd love to come to the next freestylers meeting and discuss this further with you. When will it be?

Also, how do you ever fully pay off the loan with an offset account then. Like say I have a loan for $100k, and eventually I put in $100k into my offset account. Does that mean the loan is now paid out?

Cheers

Anon
 
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Sim

Administrator
Reply: 1.1.1.1.1
From: Sim' Hampel


On 6/7/02 1:16:00 PM, Anonymous wrote:
>Wow. Thanks Sim. You've
>explained that very well. I'd
>love to come to the next
>freestylers meeting and
>discuss this further with you.
>When will it be?

Unfortunately you've just missed this months meetings. I don't know which state you are in... go to http://www.freestyler.net.au/freestyler_meetings.html to find out where and when your local meetings are. I am in Sydney and generally try and get to both the southside and the northside meetings each month.

I will be at the Big BBQ in Canberra at the end of this month though !

>Also, how do you ever fully
>pay off the loan with an
>offset account then. Like say
>I have a loan for $100k, and
>eventually I put in $100k into
>my offset account. Does that
>mean the loan is now paid out?

No, it doesn't mean the loan is paid out... however it does mean that you will not be charged any interest on the loan while you keep that money in the offset account.

If you wanted to pay out the loan, you would go to your bank and get them to close the loan account, using the funds from the offset account to pay it off, or something like that.

 
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