Paid with PPOR Offset....Will this work?

[Rob G.]

Where is the problem ?

Funds borrowed and not mixed with any other.

Funds used within a continuum of events relating to payment of investment expenses.

Sometimes issues arise where funds are mixed or transferred through other accounts for other purposes and there is a distinct hiatus with regard to investment activity.

None of that applies to your disclosed facts.

 

[wylie]

I'm confused now.

We are renovating a house to sell. I bought a toilet from Bunnings yesterday, paid on my card and will draw down the trust working account or the LOC to reimburse myself. My brother will update the spreadsheet to show that the funds coming from the LOC (or the trust working account) is to reimburse me for the purchase, docket filed away for tax time.

I will be reimbursed from the trust working account, where all rents go in, and all expenses for the houses go out or from the LOC. The LOC works like an umbrella loan, and we keep tight documentation to show who has borrowed what, if it is a loan to a child for a car, or if the drawing is for a toilet purchased for an IP.

It is all tightly documented and correctly apportioned at tax time. Our accountant has never raised an issue about anything amiss. Only expenses relating to a particular house are claimed for that particular house.

We are in the process of closing the trust down, so this rather messy situation will soon be gone.

So, am I wrong in paying for the toilet on my credit card and having myself reimbursed via either a LOC or from the trust working account where all rents go in?

If that is wrong in the eyes of the ATO, then how do I pay for a toilet? I could ask Bunnings if they would allow me to transfer funds from either the LOC or the working account to their account. I doubt that would fly.

I guess I "could" arrange a cheque book but I don't want more paperwork.

With lots of different items having to be purchased to renovate this house before we market it, I will be needing to pay for things. I have to either draw cheques, draw cash from the working account or LOC to pay cash, put it on my card and reimburse myself by transferring from the LOC or working account to my bank account. Is this wrong?

 

[jward101]

You would be incurring interest without producing an income.

Let us know the result of your PBR.

I'll check my fine print but my understanding is that Interest is charged on balances at the end of day on loans and accounts.

My prescribed actions would see funds cleared from my account before this time essentially meaning the end of day balance on an interest bearing account would be zero for 365 days of the year, despite the intra-day activity that occurs.

I hope this general advice is helpful to other readers. I learnt a load of stuff in the short time this thread has been up.

 

[Paul@PFI]

The views taken by the ATO in TD 2012/1 can be applied far far broader than many taxpayers contemplate.

If you park borrowed $ into ANY account and then later use them for a deductible purpose the ATO could consider the use of the BORROWED funds was not incurred at that time. Hence non-deductible from day one. The typical ATO BPR will refer in generic ways to how other funds are used too.

It is far far easier to ensure ALL borrowed funds are directly used to pay a outgoing. No questions need to be asked.

As a rule I get asked this question endlessly by SSers and most ask the same question ten different ways hoping their problem is different or gets better each time they ask it. Offsets are NOT where you should ever pay ANY deduction. Or interest payment !!

DONT PARK NEWLY BORROWED $ IN ANY ACCOUNT is my general rule. Its better to put it back into the loan. Then redraw when needed. Just check you have a redraw before depositing it there.

 

[Terry_w]

I'm confused now.

We are renovating a house to sell. I bought a toilet from Bunnings yesterday, paid on my card and will draw down the trust working account or the LOC to reimburse myself. My brother will update the spreadsheet to show that the funds coming from the LOC (or the trust working account) is to reimburse me for the purchase, docket filed away for tax time.

I will be reimbursed from the trust working account, where all rents go in, and all expenses for the houses go out or from the LOC. The LOC works like an umbrella loan, and we keep tight documentation to show who has borrowed what, if it is a loan to a child for a car, or if the drawing is for a toilet purchased for an IP.

It is all tightly documented and correctly apportioned at tax time. Our accountant has never raised an issue about anything amiss. Only expenses relating to a particular house are claimed for that particular house.

We are in the process of closing the trust down, so this rather messy situation will soon be gone.

So, am I wrong in paying for the toilet on my credit card and having myself reimbursed via either a LOC or from the trust working account where all rents go in?

If that is wrong in the eyes of the ATO, then how do I pay for a toilet? I could ask Bunnings if they would allow me to transfer funds from either the LOC or the working account to their account. I doubt that would fly.

I guess I "could" arrange a cheque book but I don't want more paperwork.

With lots of different items having to be purchased to renovate this house before we market it, I will be needing to pay for things. I have to either draw cheques, draw cash from the working account or LOC to pay cash, put it on my card and reimburse myself by transferring from the LOC or working account to my bank account. Is this wrong?

I've never paid to use a toilet (except in Thailand).

You cannot reimburse yourself, but a trustee can remimburse a beneficiary.

 

[wylie]

I've never paid to use a toilet (except in Thailand).

You cannot reimburse yourself, but a trustee can remimburse a beneficiary.

Thanks Terry. I am a trustee and a beneficiary (I think). So, for example, last night the toilet cost me $170. I paid on my credit card, came home sent a scan of the receipt to my brother. He drew on the LOC and added the cost to the spreadsheet for the house the toilet is going into. (I can transfer myself but we prefer that everything passes through him so we both know who is making the transfer and adding to spreadsheets).

So, we are not drawing on either the trust working account or the LOC and placing it anywhere funny. It is a straight refund to me of money I've spent. Can you see any problem with this?

Same happened yesterday as I paid professional cleaners. They wanted cash instead of a transfer and I guess that is fair enough. They don't know me and I could decide not to pay them, so cash is king. They left me a full itemised receipt. So, unable to transfer from the LOC or working account, I drew cash, paid them and last night had my account reimbursed from the LOC.

 

[Paul@PFI]

Wylie - That's fairly straight fwd. LOC is a loan. The use of the $ is fine for a loan interest deduction (albeit being a trivial value based on 5% x $170 = $8.50 tax deduction)

The problems above relate to use of an offset or through an interposed savings account.

A trustee has a different set of rules in practice. A trustee can borrow money to repay/discharge money owing to a beneficiary. The beneficiary can use it to repay their own PPOR loan and it can end up deductible. It the use of the borrowing by the trust that faces the test not the use by the beneficiary. Its akin to examining what Bunnings do with the money you paid for the loo. You don't need to look that far. (A simplified analogy)

 

[wylie]

Thanks Paul. My toilet is just one of the payments I'm going to be making and needing to be reimbursed for as we are starting a minor renovation prior to sale.

After saying this is not something I usually need to worry about earlier in the thread, here I am having to make many payments for items and services. So thanks for clarifying this for me.

 

[Rob G.]

The views taken by the ATO in TD 2012/1 can be applied far far broader than many taxpayers contemplate.

I don't understand how the Commissioner's position on a debt recycling scheme creates a blanket denial of deductions when funds are moved between accounts.

If you park borrowed $ into ANY account and then later use them for a deductible purpose the ATO could consider the use of the BORROWED funds was not incurred at that time. Hence non-deductible from day one. The typical ATO BPR will refer in generic ways to how other funds are used too.

Simple tracing where funds are not mixed will be sufficient.

It is far far easier to ensure ALL borrowed funds are directly used to pay a outgoing. No questions need to be asked.

As a rule I get asked this question endlessly by SSers and most ask the same question ten different ways hoping their problem is different or gets better each time they ask it. Offsets are NOT where you should ever pay ANY deduction. Or interest payment !!

The problem is simply that people are not using offsets correctly.

DONT PARK NEWLY BORROWED $ IN ANY ACCOUNT is my general rule. Its better to put it back into the loan. Then redraw when needed. Just check you have a redraw before depositing it there.

Biggest problem is the loan being closed if all the funds are temporarily repaid pending your purchase.

The SS forum seems to be establishing an ultra conservative position on movement of funds whereas the real problem is the incorrect use of offsets.

 

[Rob G.]

Same happened yesterday as I paid professional cleaners. They wanted cash instead of a transfer and I guess that is fair enough. They don't know me and I could decide not to pay them, so cash is king. They left me a full itemised receipt. So, unable to transfer from the LOC or working account, I drew cash, paid them and last night had my account reimbursed from the LOC.

There is no issue of mutuality here.

You incur expense as trustee or agent.

Trust reimburses you under an agreement. There is no income or deduction for you. The trustee has incurred the expense.

If the trustee borrowed to pay this expense then it may be able to deduct the interest.

 

[wylie]

Thanks Rob G.

 

[aussieB]

The SS forum seems to be establishing an ultra conservative position on movement of funds whereas the real problem is the incorrect use of offsets.

Hi, Would you please share what is the correct use of offsets ?

 

[Paul@PFI]

The SS forum seems to be establishing an ultra conservative position on movement of funds whereas the real problem is the incorrect use of offsets.

YES !!! Well said Rob.
I see more problems using an offset than I see benefits sometimes. Just yesterday I had a new tax client. They sold down some investments (acquired using loan) and parked proceeds in loan offset. Theory was so they could reacquire new investments another day. I explained that the loan is now non-deductible forever more. The s8-1 connection is severed on the sale of the underling investment which was acquired originally. The only way to fix this would be a fresh loan at that time.

 

[Paul@PFI]

Hi, Would you please share what is the correct use of offsets ?

In its most basic form....
1. Loan linked to offset is non-deductible
2. Savings in offset
Benefit of offset is reduction in interest that is not deductible. Gross-ed up benefit equates to a tax free 4.5% earning rate.

All other variants outside this could pose a issue in use. (I said "could")