Loan Deductibility and Accountant Quality

D

DennisLeung

Hey guys,

I only have one IP at the moment which was recently refinanced with the equity converted into a sum of money into the offset account. Previously it had been paid down to about 67% (money paid directly into the mortgage - not offset). With this new sum off money in the offset account I was always planning to use it to buy property and still am but recently decided to amalgamate all my bank accounts under one bank to eliminate the trouble of having many accounts open. Also I thought it would be handy to save some interest. Therefore I decided (in hindsight, wrongly) to use the offset account as a daily transaction account with direct salary crediting to maximise amount of money in there at one time and to use the credit card attached to the loan package. Since then I have already spent a portion of the money in the offset account and also am depositing my rents and salaries into there.

Originally I thought that I had read on the forum that considering before the refinancing we had already paid down the loan to about 67%, that the refinance money would be non tax deductible anyway ('dead money' - akin to that put straight into a PPOR), but I recently engaged an accountant who was advertised as a specialist property tax accountant in order to complete the 2013 return and was told otherwise. They stated that it was a mistake to use even the partial amounts of refinance cash in the offset account for non investment purposes and because of this I have destroyed the deductibility of the money in the offset account. Is that true or not? I always thought that it would have been non deductible anyway? If it is, is there any way to remedy the situation? Someone in the family suggested refinancing again but wouldn't that involving paying down the mortgage to 0 first? Would it be OK to continue direct salary crediting?

The other issue I feel warrants discussing is the quality of this accountant. I feel like they did not offer any real solutions to this issue even after asking and prompting. They simply mentioned to separate the spending but no way to rectify the situation if it has gone bad or even whether or not there is a way. Is it within the role of the accountant to provide such solutions? I know ultimately every decision needs to be made by me but want to query the level of cooperation.

Any feedback is appreciated.

Thanks
 
Whilst an accountant is the right person to give you tax advice, a lot of accountants aren't going to give you ideal loan structuring advice. This should come from a broker, but unfortunately a lot of brokers aren't as good at this as they should be.

My suggestion would be:
1. Move the money from your offset account back to your loan.
2. Refinance the loan again or possibly split the loan properly to give it a fresh start, so it's properly structured to give you the right split between non deductable and deductable debt.
3. Accept that figuring out your deductable interest this year may be painful.

Your problem can likely be fixed, but you need to set it up properly before you buy another property.
 
The accountant is right, the money might have been deductible but is now both contaminated and partly paid down.

You will now be required to reconstruct all the transactions in this offset account before you can determine the percentage that could be regarded as the original borrowing which could be split off and quarantined.

You will be surprised at how little remains on an active account like this.


Cheers,

Rob
 
I think just to make it clear the OP has set up two loan accounts - one for his original loan and the other split for his 'equity' release in the property. This makes the entire conversation moot since all he needs to do is put the offset money into the secondary loan account prior to purchasing a property, then bang, all deductible.
 
Dennis,

Can you please provide some figures and loan accounts on what you did?

eg. Loan A $100,000, then borrowed $20,000 by increasing and put this into offset A etc etc
 
DennisLeung said:
Therefore I decided (in hindsight, wrongly) to use the offset account as a daily transaction account with direct salary crediting to maximise amount of money in there at one time and to use the credit card attached to the loan package. Since then I have already spent a portion of the money in the offset account and also am depositing my rents and salaries into there.
Click to expand...

If you redrawn funds were also in this account then comingling has occurred.

Cheers,

Rob
 
Your only hope is the original 67% is protected but that depends on how you arranged it. As mentioned above more details are required.

With the salary deposit, spend on card arrangement the funds are quickly flushed through for non deductible purposes so I would guess your redraw component is already too far gone.

I would not jump to any conclusions about your accountant yet. He is probably right in offering you no alternative as there may be none. You should have spoken to him prior to financing.
 
Previously I had a $280,000 mortgage on a $475,000 property with an old bank. With this old bank the structure was an offset account with a loan account. The offset account had $0 and the loan account was in DR to the tune of $280,000.

With the new refinanced structure, we pulled out $100,000 in equity and converted this to cash. So the situation before I touched the structure was one offset account linked to two loan accounts. The offset had $100,000 in new cash with one loan account in DR to the tune of $100,000 and the second loan account in DR of $280,000.

Since then I have deposited the rents into the account and spent some money for private expenses, to pay off the credit card attached to the package.
 
DennisLeung said:
Previously I had a $280,000 mortgage on a $475,000 property with an old bank. With this old bank the structure was an offset account with a loan account. The offset account had $0 and the loan account was in DR to the tune of $280,000.

With the new refinanced structure, we pulled out $100,000 in equity and converted this to cash. So the situation before I touched the structure was one offset account linked to two loan accounts. The offset had $100,000 in new cash with one loan account in DR to the tune of $100,000 and the second loan account in DR of $280,000.

Since then I have deposited the rents into the account and spent some money for private expenses, to pay off the credit card attached to the package.
Click to expand...

So you had a $280,000 loan
borrowed $100,000
parked it into the offset
ended up with a $380,000 loan as a result, and
then mixed non borrowed money with the borrowed $100,000

--
Think of the loan as being in 2 portions
a) $280,000 and
b) $100,000

Assuming both 'loans' used for what you would call investment purposes.

The $100,000 loan won't be deductible in full because you have borrowed money and mixed it. It could be argued that it is partially deductible.

To work this out will be very difficult. You would have to work out how much non borrowed money you placed into this offset account.

e.g if you deposited $20,000 into it, then possibly $80,000 of the loan may relate to the $100,000 borrowed, so possibly 80% of the interest on this $100,000 loan may be deductible.

But, it won't be this easy as you would have interest accruing along the way with the balance varying from time to time.

I think you could solve the potential problem by working out, first, the portion of this money that relates to the $100,000 borrowed amount and the refinancing the loan and splitting it into the relevant portions.
 
DennisLeung said:
The other issue I feel warrants discussing is the quality of this accountant. I feel like they did not offer any real solutions to this issue even after asking and prompting. They simply mentioned to separate the spending but no way to rectify the situation if it has gone bad or even whether or not there is a way. Is it within the role of the accountant to provide such solutions? I know ultimately every decision needs to be made by me but want to query the level of cooperation.

Any feedback is appreciated.

Thanks
Click to expand...

Perhaps this account thought it was beyond saving.

Also, you went in for the tax return to be done, did you actually ask the question on how it could be rectified?
 
Move $100k from the offset account back into the redraw of the loan account. Then split the loan into two accounts of $280k & $100k (with the $100k account with no funds owing and the $280k loan fully drawn).

The solution is fairly simple, but figuring out the deductability of the loans from your first restructure to the second could be difficult.
 
PT_Bear said:
Move $100k from the offset account back into the redraw of the loan account. Then split the loan into two accounts of $280k & $100k (with the $100k account with no funds owing and the $280k loan fully drawn).

The solution is fairly simple, but figuring out the deductability of the loans from your first restructure to the second could be difficult.
Click to expand...

From a tax POV, this could make things worse. If it is a mixed loan then any repayment would come off deductible and non deductible portions. Would probably be better to split the loan first and then pay off any non deductible portions of the loan independently of the deductible portions.

Dennis needs help!
 
Terry_w said:
Perhaps this account thought it was beyond saving.

Also, you went in for the tax return to be done, did you actually ask the question on how it could be rectified?
Click to expand...

There was no response from her after I asked the question. They simply said - don't mix the money in the future.

Also, let's consider this money as dead money, how much would I stand to lose per year in terms of deductions?

Also, the loan is already split, it was split during the refinancing. It was already 100,000 DR in one split and 280,000 DR in the other.
 
Terry_w said:
From a tax POV, this could make things worse. If it is a mixed loan then any repayment would come off deductible and non deductible portions. Would probably be better to split the loan first and then pay off any non deductible portions of the loan independently of the deductible portions.

Dennis needs help!
Click to expand...

It could, depending on the specific uses of the loan before and after the initial refinances. It could also solve the problem. The real tricky part is determining how much of the loan is tax deductable right now.
 
If you are saying the original $280k loan is separate from the $100k redraw facility then I don't see a problem with the deductibility of the original $280k.

Am I right in saying you have the following arrangement:
$280k loan
$100k loan offset by $100k cash in account
 
MRO said:
If you are saying the original $280k loan is separate from the $100k redraw facility then I don't see a problem with the deductibility of the original $280k.

Am I right in saying you have the following arrangement:
$280k loan
$100k loan offset by $100k cash in account
Click to expand...

Yes, that's right. I'm not really worried about the deductibility of the $280k, but rather the deductibility of the $100k
 
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