Lending to a partner question

Hi All,

If a wife has the PPOR in her name only including the attached loan and over time builds up enough equity that can be drawn out, and she then draws that money out and does nothing with it, it isn't tax deductible as the purpose of the redraw is of a private nature.

What if she lends that money to her husband to buy an investment property and charges him the same interest rate her bank is charging her, can he claim the interest expense as his borrowed money purpose from her is investment but she has no claim for interest on the money she lent him? Would she need to include this as income though.

This way releasing equity in her property so he can buy an investment.

Why would you do this? Wife owns PPOR in her name only but investment is in husbands name. So he doesn't have to include a big non deductible debt when he goes to borrow each time. Banks usually include the entire debt on a property even if in two names. This way the husband never needs to declare a huge non deductible debt to them when he borrows. He only has income producing investment debt. This way if the investments go belly up the bank can't take the PPOR. Yes she would technically still owe all that cash she lent him but hopefully not lose their PPOR which is untouchable for his debt as it is in her name.

Is this correct?
 
Hi All,

If a wife has the PPOR in her name only including the attached loan and over time builds up enough equity that can be drawn out, and she then draws that money out and does nothing with it, it isn't tax deductible as the purpose of the redraw is of a private nature.

What if she lends that money to her husband to buy an investment property and charges him the same interest rate her bank is charging her, can he claim the interest expense as his borrowed money purpose from her is investment but she has no claim for interest on the money she lent him? Would she need to include this as income though.

This way releasing equity in her property so he can buy an investment.

Why would you do this? Wife owns PPOR in her name only but investment is in husbands name. So he doesn't have to include a big non deductible debt when he goes to borrow each time. Banks usually include the entire debt on a property even if in two names. This way the husband never needs to declare a huge non deductible debt to them when he borrows. He only has income producing investment debt. This way if the investments go belly up the bank can't take the PPOR. Yes she would technically still owe all that cash she lent him but hopefully not lose their PPOR which is untouchable for his debt as it is in her name.

Is this correct?

Yes, this is how I advise people to do things, generally.

But don't assume they can't take the PPOR. This would depend on how things are structured who paid for things.
 
Loan in Hubby's name with wife as guarantor doesn't release the deposit from the PPOR equity and then potentially puts the PPOR at risk if she uses this as the collateral for the guarantor.

Assuming the wife's only part in the transaction was to lend the husband money and then all other expenses are paid out of the husband bank account or loans etc then surely if he goes belly up the bank couldn't take the Wife's PPOR.

In fact wouldn't she become one of his creditors that's owed money.

Of course from a tax view point the husband could never own a PPOR at the same time as they are together. Unfortunately you lose your identity when you get married and your right to a PPOR tax advantage is watered down by 50%.
 
At the top of the chain, the wife has borrowed money using her house as security ... her house is at risk if she cannot repay the bank.

Lending/giving money to husband to invest = sexually transmitted debt that needs independent legal advice for the wife. Quite often a naive or ratbag spouse exerts undue influence.

If she has loaned on a commercial basis then she may be able to claim a tax deduction for her interest expense, however the interest receipts are also assessable income. Similarly the husband's interest payments may be deductible.

Note the use of the word "may" indicates that some or all interest may not be assessable/deductible depending upon detailed circumstances.

Even unsecured debt repayable at call would normally need to be disclosed to a potential lender as it would be relevant to their estimate of risk.
 
I would avoid blending the loan amount for hubby with the private stuff. Its too hard to segregate and it is a "blended loan". Instead I would recommend a sub account that isolates the deductible from the non-deductible provided repayments are made to each sub account. (ie hubbies cant compound while non-deductible reduces).

Of course there are issues Alexlee raises that should be considered. Proper loan agreements that reflect the "back to back" onlend should be completed. So although loan is in wife's name it is essential a loan that is paid by and deductions claimed by hubby. In theory wife's ITR is also affected...But her assessable equals her deductible. I say in theory as it is generally ignored. Its a good reason why you don't add a margin etc.

Robs comments are also well worth considering. Don't want hubby using the loan like an ATM
 
There would be no blending under the approach I described. Wife would pull equity from PPOR and on lend it to hubby as deposit on an investment property. Hubby would then get a loan for the difference in his own name. The investment would be purchased in Hubbys name only. Wife is always no where near the investment deal protecting the PPOR except for the equity pulled to lend hubby. Of course there is risk associated with that.

Its primarily to avoid telling the bank about a huge debt because you happened to buy a PPOR in two names. I think this could be very limiting on the couples ability to borrow and invest. In theory hubby has no debt on a PPOR because he doesn't own one and therefore his ability to borrow in theory could be better than the wife's. Well until she built up a fair chunk of equity.

Under this approach i have assumed they will stay together and then at some point hubby would be all invested up and can sell and pay down the family home in the wife's name or pay it off with the incoming rent from his investments after paying investment debt etc.

I take the point about STD but whats the view on this. If they were to ever get divorced wouldn't everything they owe be put back on the table to be divided. And under this scheme sure the wife pulled some equity to lend the husband but in theory he would be taking on the bigger part of the investment debt. She could lend him 3 lots of 10% deposit with him getting loans for the 3 lots of 90% borrowed funds needed. Of course he could go banana's and sell up and run off. and to that point she could do the same with the PPOR. But that too me seems to be living in a world of not really trusting the person you are with and that probably means you are in the wrong relationships to start with.
 
There would be no blending under the approach I described.
I don't think that's what Paul meant by blending; I understood him to mean that the wife's two loans should be separate accounts rather than one (blended): original loan (loan 1) amount for PPOR, and a new "loan 2" account for the extra equity withdrawn and on-loaned to husband.

If that's not done, then all loan repayments would decrease both the non-deductible original debt - loan 1 - and the potentially deductible loan 2 portion, which is not what you want. You want to preserve loan 2 as deductible and reduce the balance on loan 1, and that can only be done if the accounts are kept separate.
 
With the wife as guarantor, the PPOR IS at risk. The husband fails to pay, the bank goes after the guarantor.

With a wife borrows / onlends to husband, the PPOR is probably not at risk.

There is a general argument that a main residence by one spouse is really owned beneficially by both of them 50/50. ie the wife is trustee for the husband's 50%.

This could be rebutted if the wife used her own money to buy the property, paid all the loan payments herself with her money and the husband made no contributions, neither financial or non financial.

So on the bankruptcy of the husband, a wife's property could be at risk.
 
Don't forget to consider
Death
Incapacity

Where properties you don't legally own could go,
the effect of loans
cashflow issues etc.
 
Don't forget to consider
Death
Incapacity

Where properties you don't legally own could go,
the effect of loans
cashflow issues etc.

Hi Terry

You often bring this up in discussions. Is the answer in setting up a will? Can you give us a bit more of the picture please.

Many thanks
 
Hi Terry

You often bring this up in discussions. Is the answer in setting up a will? Can you give us a bit more of the picture please.

Many thanks

I like to focus on the positives :p

Check out my newsletter as I covered these topics.

Bascially if you don't own something you can't really control it - even though it may be you behind the scenes paying for things etc.

Imagine everything is in the wife's name and then she becomes incapacitated and her mother is then in control under a power of attorney. Or your wife dies and leaves all her assets (your assets in her name) to the RSPC - you could challenge this under family provision, but costly and a hassle.

So a will is only half the answer.
 
That makes sense, yet still so cryptic :) I guess everyone's circumstances are different so it would be hard to provide a generic solution. Thanks for the pointers anyway.

Cheers
 
Back
Top