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

[jward101]

I've read 'How to avoid mixing personal and investment funds when paying IP expenses?' but couldn't spot this particular question in there. Dropping question here for myself and anyone else that comes along later with a similar scenario.

I grabbed some ceiling fans for our IP using our PPOR Offset (1) debit card today. I have:

1. PPOR Offset
2. IO Loan Sub-Account
3. Equity IO Loan

If I was to redraw exact amount for the transaction from 3 > 2 > 1 (or 3 > 1) would that break the required deductibility principles (of not mixing personal and investment funds)? Does my highlighting affect this at all?

 

[Terry_w]

Interest is only deductible on money borrowed to acquire.....

You have already acquired the fans.

So nope.

 

[wylie]

Interest is only deductible on money borrowed to acquire.....

You have already acquired the fans.

So nope.

I was told years ago that if I bought something (fans, pavers?) for an IP on my credit card, as long as I transferred the exact amount from a loan for that IP to pay back the credit card, the interest on the drawing to repay the card would be claimable.

This is not something we do but does that mean anybody buying something for an IP using their own funds, or a credit card, and reimbursing themselves, or reimbursing the card at the end of the month is messing up the deductibility of the loan that is drawn to reimburse?

 

[Rob G.]

I was told years ago that if I bought something (fans, pavers?) for an IP on my credit card, as long as I transferred the exact amount from a loan for that IP to pay back the credit card, the interest on the drawing to repay the card would be claimable.

You obviously did not pay for an informed opinion or you missed a lot of important little details.

 

[wylie]

You obviously did not pay for an informed opinion or you missed a lot of important little details.

I didn't pay for any opinion .

I just was told that by someone, cannot remember who, but it wasn't the lady at the bus stop. Maybe it was the cat? It was either a broker, an accountant or someone who should have known better. Clearly then it isn't the case?

Doesn't affect me because I don't use this method of reimbursing my card.

 

[Tim86]

I thought in this situation all you could do would be to keep the receipt and when it comes to selling and paying capital gains tax, using that as a deduction.

 

[jward101]

Thanks Terry_w. The more I read on here the more I understand why your general recommendation is to setup a LOC. Much simpler. I guess that means I've paid for that with non-deductible after tax dollars. Moving on and wanting to pay for expenses with borrowed funds rather than my savings how best do I leverage available funds currently sitting as a redraw amount in my IO Equity Loan (3)?

To borrow from another thread similar to my situation (Bills IP) where you note the following:

Where has the extra $10k gone? if you have $10k in redraw then you could borrow to pay expenses on the investment. Just don't transfer to a savings account, even briefly.

I transferred excess equity/settlement funds back into the IO (3) from the IO Sub-account (2) on the day of settlement to ensure my excess funds weren't 'parked in a storage facility for borrowed funds' (Domjam? I think).

My IO Account (3) can only redraw to my Investment Sub-Account (2) and not to an external payee so to pay for a new Aircon or a Trade service like a painter I have no choice but to dip into our PPOR Offset (1). Should I have left the excess settlement funds in the Sub-account (2) (no personal transactions) and paid for these expenses before transferring the balance to the IO Loan (3)?

Moving forward I'm curious and interested to know how to 'borrow to pay expenses on the investment' and also if my actions could have been varied to remove some of this complexity (ie delay transfer of excess equity funds from Sub-account (2) to IO Loan (3) until after paying expenses).

Thanks again you guys. I haven't spotted this type of scenario posed in this way before so I'm framing it for my own situation (*ahem* lowest common denominator) but hopefully so future readers also get some benefit from it.

 

[jward101]

I transferred excess equity/settlement funds back into the IO (3) from the IO Sub-account (2) on the day of settlement to ensure my excess funds weren't 'parked in a storage facility for borrowed funds' (Domjam? I think).

Should I have left the excess settlement funds in the Sub-account (2) (no personal transactions) and paid for these expenses before transferring the balance to the IO Loan (3)?

Curious to know what timeframes around keeping excess equity funds in an investment only sub-account would be considered unacceptable with regards to the 'parking borrowed funds' phrasing noted earlier. By going from this account to a loan product have I removed any means of conveniently accessing these funds? Is a Refi required?

 

[Terry_w]

Curious to know what timeframes around keeping excess equity funds in an investment only sub-account would be considered unacceptable with regards to the 'parking borrowed funds' phrasing noted earlier. By going from this account to a loan product have I removed any means of conveniently accessing these funds? Is a Refi required?

Technically even 1 second would be too long. But the ATO may be more lenient and allow the tracing of the borrowed money from the loan to the offset and then to the expense at long as there is no other money in that offset. But this view comes from a private ruling which you may not be able to rely on.

 

[Terry_w]

I have no choice

You do have the choice of setting up your loan correctly, but perhaps no choice under this loan. There is a danger in transferring money to a savings account, even if empty. Seek personal tax advice.

I would recommend using a LOC product to avoid these sorts of issues.

 

[Paul@PFI]

Or if you had redraw on the loan when the new funds were put into the savings account at settlement you could also repay the loan. Then redraw it when the funds are actually needed.

My bank (Westpac) explained why they do this so often. Apparently the standard mortgage refers to an advance. Not an increased limit. So when new funds are made available they don't just up the limit they draw down the topup and put the $$ in an account. Repaying it and redrawing it later might be more practical.

 

[jward101]

Thanks guys. While this might be your every day I do appreciate the advice and patience you've shown.

setting up your loan correctly

Ouch Really? I can't be the first or only person to be asking about an Equity Split/Redraw/Sub-Account >> Investment Expense scenario. Or is it that everyone else is either using a LOC or simply ignorant or unaware of what they are doing? (Just read Domjam notes. Wow.)

perhaps no choice under this loan.

So with a Loan product containing unused equity (as available redraw), if it doesn't have Direct Credit facility to pay for an investment product or service then future punters reading this should go the LOC product OR seek a Private Ruling similar to the one you alluded to?

The last post by Paul sounds similar to my situation. Different lender and if I read correctly different movement of funds at settlement. My equity product was created with $100DR* balance & $0CR redraw balance and a corresponding Sub-Account had the same amount in it ($100CR). This is where settlement funds were drawn from and where I transferred excess settlement funds from.
*Demo number only

Seek personal tax advice.

Absolutely and always!

 

[neK]

How would one pay from their LOC at a shop (eg Bunnings) when buying items for an IP?

Is there card access from a LOC?

 

[Terry_w]

How would one pay from their LOC at a shop (eg Bunnings) when buying items for an IP?

Is there card access from a LOC?

It would be hard for this sort of thing. I think some lenders may provide a debit card for an LOC - but I have never really looked into it.

I think if you buy using a credit card with no other private expenses you should be able to refinance this loan with a LOC loan.

Rob, can you elaborate on your comments above? Even a mixed credit card could possibly be apportioned according to paragraph 12 of that TR 2000/12(from memory). Do you disagree?

 

[Rob G.]

Rob, can you elaborate on your comments above? Even a mixed credit card could possibly be apportioned according to paragraph 12 of that TR 2000/12(from memory). Do you disagree?

TR 2000/12 allows you to split once you have reliably determined the proportions. It does not let you notionally repay the investment portion of a mixed purpose loan.

If you are using a credit card, better to have an unmixed purpose debt balance at any time. Then you will not inadvertently dilute the tax deductible proportion by making card repayments.

In other words

1) repay the private balance to zero,
2) pay IP expense with card,
3) repay investment balance to zero from LOC,
4) use card for normal private use until next time needed when you start at step 1 again.

This requires extreme self discipline and planning. Better off with a separate card.

Rob

 

[Terry_w]

Yes, good points Rob. The credit card debt would not be split in my example but you would be notionally repaying a portion - which wouldn't work.

Best to segregate card use and not mix business with pleasure.

 

[jward101]

Hi Terry. I am hoping you can provide me with a link to the PR you mentioned earlier.

I've read TR 2000/2 a couple of times now and your historical advice [1] [2] to not redraw into any account is what I don't understand when read alongside Para's 30 & 43 of that TR. I genuinely want to make sure I'm doing the right thing so am hoping you can help with that.

 

[Terry_w]

Hi Terry. I am hoping you can provide me with a link to the PR you mentioned earlier.

I've read TR 2000/2 a couple of times now and your historical advice [1] [2] to not redraw into any account is what I don't understand when read alongside Para's 30 & 43 of that TR. I genuinely want to make sure I'm doing the right thing so am hoping you can help with that.

Here is the link for the PBR which I mentioned
Authorisation Number: 57920
http://www.ato.gov.au/rba/content/?ffi=/misc/rba/content/57920.htm
Question 1


My argument is this

Borrowed money comes from a loan.

If you borrow money and put it into a savings account it is then transformed into cash. It is no longer borrowed. But the ATO appeared to allow tracing of the money - for at least 1 person. Note that they don't even mention mixing the funds with other funds in the offset.

And I cannot understand questions 2 and 3 and how they differ to Q1.

 

[jward101]

Thanks Terry. This helps with my understanding.

My account in question isn't an offset, isn't used for personal transactions and maintains a $0 balance. Putting aside that I do think I'll seek some assurance by way of a PR where I use it as an almost instant intermediary between my loan account and an external service payment account (ie. I pay a painter or for an aircon install). My usage in this way should satisfy the necessary borrowing purpose conditions any redraw brings and bypasses the situation described in the PR by completing the transaction within the same day but again I'll.....

Seek personal tax advice.

My attempt at rationalising that PR using made up numbers and made up times:

• 100k total drawn down Jan 1;
• 40k used/disbursed on Jan 1 (Q1);
• 60k parked during January (Q2); and
• 60k expended on Feb 1 (Q3).

Interest Expenses
40k is deductible Jan 1 > Jan 31 (Q1)
60k is non-deductible Jan 1 > Jan 31 (Q2)
100k is deductible Feb 1 onwards (Q3)

 

[Terry_w]

If it isn't an offset there is an issue of a loss of interest while waiting to invest. You might be pay 4.50% on a loan which is invested into a savings account earning 1% interest. You would be incurring interest without producing an income.

Let us know the result of your PBR.