Loan Contamination

Discussion in 'Accounting and Tax' started by albanga, 5th Jun, 2015.

  1. albanga

    albanga Member

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    @Terry, thank you very much for all your response and wisdom on this topic, your work on these forums are truly appreciated. Next time I come to Sydney I will need to buy you a scotch (on the rocks of course, not mixed with anything ;)
     
  2. Terry_w

    Terry_w Member

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    No mixing. And don't try and buy me an orange juice with milk in it, or I might think there is something else in it.
     
  3. Kbuzz

    Kbuzz Member

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    LOC and contamination

    I have been reading through this thread and I believe I do get it when it comes to loan contamination. I have set my borrowing up at present where they are A.OK for the taxman and the accountant is happy.

    My question is this... there is a Macquarie Global Limit LOC - with three splits. PPOR, Day to day split for wages and spending and investing split. The investing funds are used only for deposit on IP1 and expenses associated with IP1. A separate loan exists for IP1 with another bank.

    There are funds available in the IP split that have not been drawn down - to use for IP2 deposit - but we have hit serviceability cap so IP2 on hold for now.

    The funds in the day to day split have diminished (renovating PPOR).

    The bank will move some of the limit of the IP split to either a new split or the day to day, which will allow us to continue the renos.

    Does this impact deductibility? Can I move some of the available credit over?

    My guess is no we cannot move it over without impacting our deductibility and probably just best to keep saving for the reno, but thought it was worth asking. Thoughts?
     
  4. Terry_w

    Terry_w Member

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    Deductibilities depends on borrowings, so changing the credit limits on loans should not matter as long as drawn amounts don't change.
     
  5. Kbuzz

    Kbuzz Member

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    Good news. Thanks for the reply Terry. :)
     
  6. mugen

    mugen Member

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    I've been asking my lender about re-fi'ing my loans with split loans.

    According to him, he says it's not necessary as he says my tax accountant would take care of calculating the deductible and non deductible part.

    Is this a common answer that lenders tend to palm to people?
     
  7. Paul@PFI

    Paul@PFI Tax, SMSF & Planning

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    Your lender has just displayed why they aren't allowed to give tax advice. They are 100% wrong wrong wrong.

    You don't want a loan that is blended. It always results in issues.
     
  8. Terry_w

    Terry_w Member

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    Yes this is very common - but as Paul says they are not allowed to give tax advice. The trouble is most people would just accept what they say.
     
  9. Jess Peletier

    Jess Peletier Mortgage Broker, Perth

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    While they can't give tax advice, it's SO important that they understand the tax implications of the loans they're setting up!

    Most have no clue. Or interest in getting a clue.
     
  10. Befuddled

    Befuddled Member

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    My missus is in a tricky/messy situation.

    The figures below aren't exact but portrays her situation.

    A few years ago she purchased IP1 for 500k. Instructing her broker to get her the best rate possible, she acquired a loan larger than the purchase price of IP1 by getting her mum to cross her PPOR against it. The loan was 700k. She then parked the excess 300k in the offset. So she was effectively paying interest on the same 400k but at a slightly better. (To make things more confusing her mum has 5% ownership of IP1.)

    Her wages and savings have also gone into the offset account since purchasing IP1.

    She then bought IP2 for 700k @ 80% LVR, paying for the remaining 20% directly from her offset account.

    She's now trying to refinance to another bank and in the process:

    1. Unwind the IP1 loan and unencumber her mum's PPOR.
    2. Draw out equity from IP1, which has now been re-valued at 600k.

    After refinancing the total loan would be 480k (80% LVR of 600k). Broker says split loan is not required as total loan has actually dropped from 700k :confused:.

    I'm concerned about this comment because the extra 80k in equity being taken out is not by definition money taken out to invest (there's been no investment made!).

    I'm wondering if she should have the equity put in a separate split:

    loan 1: 400k (80% of purchase price of IP1).
    loan 2: 80k (equity). Money not taken out.

    Am I right on this?
     
  11. Jess Peletier

    Jess Peletier Mortgage Broker, Perth

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    From what I understand from your post - To release mum's property from IP1 without using any cash, equity from another property or further x-coll, you'll have to pay LMI as the LVR will be around 83%. This uses all IP 1 equity, and releases Mum's PPOR with no loan attached.

    However - due to the total loan being $700k and some of that being used for IP2, you're probably all x-colled up and how it untangles will depend on the value of Mum's property, the value of IP2 as well.

    I'd say it's unlikely that Mum's property will be unencumbered at the end, however it could definitely have the risk against it reduced.
     
  12. Jess Peletier

    Jess Peletier Mortgage Broker, Perth

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    Hypothetically at the end it could look like this -

    IP1 - 80%
    Ip2 - 80%
    Mum's PPOR - 3% toward IP1
    - 20% toward IP2 (or the balance if value on IP 2 has gone up.)

    All secured individually so no more x-coll.
     
  13. Terry_w

    Terry_w Member

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    No. This is going to be very messy to work out as only part of the extra $300k initially borrowed will be deductible. She will have to go through statements and work out how much cash was put in over the years. Impossible to work out accurately if cash is going in and out. Say only half of this $300k was deductible (may be much less) then the original loan is a mixed purpose loan. So work out the percentage of the $700k that is deductible.

    The non deductible portion needs to be split off. Once split it can be paid off.

    If you pay off before splitting then the amount paid will partially come off the deductible portion.
     
  14. Jess Peletier

    Jess Peletier Mortgage Broker, Perth

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    I missed this bit - oh dear.
     
  15. Befuddled

    Befuddled Member

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    Thanks Jess. I did say it was messy :(
     
  16. Befuddled

    Befuddled Member

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    Almost impossible to work out as there are 2yrs+ of mixed use.

    Going back to the milk & juice analogy (or milk and urine :eek:)...

    What you're saying is start fresh. Go to the bank and swap the milk/juice cocktail for jug of milk and jug of juice, completely separated. Pay off the orange juice. Only milk is left. Proceed with refinance

    If pay off before splitting there's no way to avoid paying off a bit of milk because it's all mixed in. :D

    Would this work?

    1. Split the 700k loan into 400k deductible and 300k non-deductible portions. Assuming can't work out how much of the 300k non-deductible portion is deductible hence taking all of it to be non-deductible.

    2. Pay off the 300k split.

    3. Refinance to new bank. Secured against IP1 only.

    loan account 1: 400k
    offset account against loan account 1: can put wages/savings in there without any problems
    loan account 2: 80k equity. Only take out for purchasing new IP
     
  17. Terry_w

    Terry_w Member

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    I would have to sit down and think, but if you could split into the relevant portions - even if one of the portions were mixed, then you could fully pay off the mixed portion and start again.