Loan contamination?

Discussion in 'Accounting and Tax' started by pckh12, 19th Dec, 2014.

  1. pckh12

    pckh12 Member

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    I would appreciate some advice with my refinance.
    The purpose of the refinance was to release equity from my PPOR for an investment property.
    I have a bad feeling that the wrong accounts were used to during settlement which would lead to issues to with tax deductibility. I am waiting to hear back from my broker but would love to hear your suggestions to fix the situation.

    I am refincing from:

    Loan 1 (Bank A) - P&I - $25,000 (PPOR)

    into:

    Loan 2 (Bank B) - LOC - $50,000, Purpose: Personal
    Loan 3 (Bank B) - IO - $450,000 (with offset), Purpose: Investment

    I was expecting the following to happen during settlement.

    Loan 1 - paid off
    Loan 2 - Balance = $25,000 (50,000 - 25,000)
    Loan 3 - $450,000, Offset: $0

    However, the following has happened:

    Loan 1 - paid off
    Loan 2 - Balance = $50,000
    Loan 3 - $450,000, Offset: $425,000

    From what I can tell, Loan 3 was used to pay Loan 1 with the remainder deposited in the offset attached to Loan 3.

    Does this mean that Loan 3 is now considered mixed-used and is will have tax implications?
    What can I do to rectify the situation?
    I am also concerned with funds being deposited into the offset of Loan 3 instead of the loan itself.
    What happens if I transfer additional savings into the offset?
     
  2. Terry_w

    Terry_w Member

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    Someone else asked a similar question yesterday.

    I can't understand what you have written. loan 3 has a balance the same as when it started. Do you mean $25k was deposited into the offiset of loan 3?

    The $25k is a private loan and not deductible. Offset is not a loan. I don't see an issue.

    I would have had the offset put against the non deductible $50k though.
     
  3. pckh12

    pckh12 Member

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    Sorry if I'm not being clear. First time doing a refinance here.

    The purpose of loan 2 was to cover the non-investment debt (from refinacing loan 1).
    The purpose of loan 3 was basically the equity release from my PPOR to cover any investment-related expenses for when I find the right property.
    The full 450k was to be available for this purpose.

    What I believe happened was that Loan 3 was drawn upon to pay off Loan 1 (ie. 25k) with the remaining 425k (450k-25k) placed into the offset attached to Loan 3.
    What I expected to happen was that Loan 2 would be used pay off Loan 1 which is all 'bad debt'.
    Loan 2 is a line of credit and cannot have an offset attached.
     
  4. Terry_w

    Terry_w Member

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    I still don't understand.

    Di you borrow $450,000 and park it in a savings account? = I would argue interest on this loan is not deductible, but it could be if the offset account contained no other funds.

    Get some tax advic e
     
  5. Paul@PFI

    Paul@PFI Tax, SMSF & Planning

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    I think I understand and appears that there is some blended loan issue. That may be easy to fix or to find a strategy to insulate it.

    Get personal tax advice as Terry says. Take the before loan statement and the after loan statements.

    I'm confused by loan 3 which has a balance ?? Technically a loan balance should only be drawn to pay for the IP. Then its deductible. Any other way may threaten deductions.
     
  6. Jess Peletier

    Jess Peletier Mortgage Broker, Perth

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    It definitely looks like #3 had been used to pay off the $25k ppor loan, so this is non deductible. However it 'could' be as easy to fix a drawing down on loan 2 to repay loan 3.

    End result loan 2 not deductible, loan 3 reset to zero with 25 k in redraw and the other $425 in clean offset, all available for investment use.

    I could be wrong - I'm sure the accountants will point out any holes if I've missed something.
     
  7. pckh12

    pckh12 Member

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    No - at least that was not the intention.
    Loan 3 was only supposed to be drawn only when I actually find an investment eg. For deposit, stamp duty etc.

    The refinance only just happened so the offset contains no other funds.
     
  8. pckh12

    pckh12 Member

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    This is why I believe there's a mistake.
    Any suggestions on how to remedy? Do I need to split the loan? Or can I transfer from loan 2 to loan 3 to reset back to zero? (and move funds from offset back into the loan)
     
  9. pckh12

    pckh12 Member

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    Thanks Jess. Definitely hope this is fixable.
    I'm not sure I understand where the $425 in clean offset comes from.
     
  10. Terry_w

    Terry_w Member

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    So you borrowed $450,000 and drew this loan down by placing the funds in an offset. Not a good idea, but these funds may be tracable to the loan so the interest may be deductible.

    But you deposited $25k - no withdrew $25k from this offset to pay down the private debt.

    The $450k loan is therefore a mixed purpose loan. Only 94.4% of the interest is deductible (at best) when the funds are used for invesitng.

    What you could do is to pay $450,000 back into the loan to extinguish the debt and then reborrow and to use these funds to invest.
     
  11. pckh12

    pckh12 Member

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    Thanks for the suggestion Terry.
    Not sure if it matters at all but the entire 450k was never placed in the offset. Instead 25k was sent as a cheque to pay off loan 1. The balance of 425k was deposited in the offset.

    My broker has suggested that I transfer 25k from loan 2 into the offset of loan 3. This would mean that I have the full loan amount of 450k sitting in the offset.
    What do you think of this? Does it matter at all that the amount funds are sitting in the offset and not the loan?
     
  12. Terry_w

    Terry_w Member

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    Is your broker a tax agent or tax lawyer? If not then disregard what they say.
     
  13. Jess Peletier

    Jess Peletier Mortgage Broker, Perth

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    From my understanding it already is - it's only the $25k that's the problem. Not an accountant though so like Terry says best to check with a pro.
     
  14. pckh12

    pckh12 Member

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    Thanks for the suggestions everyone. I will seek professional advice.
    Just for my understanding, what are the issues if I simply transfer the 25k from loan 2 into the OFFSET of loan 3 (rather than the loan directly)?
    Is it that the original borrowed funds are still considered as private use and that withdrawing from the offset will not change that?
     
    Last edited: 20th Dec, 2014
  15. Terry_w

    Terry_w Member

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    Loan 2 is a private loan. So firstly you will be creating a mixed purpose loan and any deposits to this loan will be coming off the investment portion as well as the non deductible portion.

    Secondly you are borrowing to park in an offset account with other borrowed funds.

    I would seek professional tax advice and probably start again with the loans.