Portfolio Loan

[Boomer]

Hi,

We have just had our loans refinanced (IP + PPOR + ML) under a BankSA portfolio loan with separate sub accounts. I am interested in paying down the PPOR debt at an accelerated pace - I plan to pay interest only on the IP portion of the loan, pay nothing on the ML portion and pay all that I can on the PPOR loan to reduce it down. As the loans are under the same bank I won't be capitalizing the interest on the IP sub account - I'd rather play it safe from an ATO part IV perspective.

That's a general outline of our loan structure, but the question I have relates to our rental property expenses. I am planning on paying assorted expenses such as water, rates etc through the money we have available in the IP LOC sub account. Is this a valid way of reducing PPOR debt bearing in mind the loans structure is LOC with the one bank? Under this arrangement our share dividends and money that would normally have gone toward IP rates, water etc would help to pay down PPOR debt. In my mind this would be ok for tax purposes, just would like to get peoples opinions/thoughts on this structure.

Thanks,

 

[Rob G.]

Hi,

We have just had our loans refinanced (IP + PPOR + ML) under a BankSA portfolio loan with separate sub accounts. I am interested in paying down the PPOR debt at an accelerated pace - I plan to pay interest only on the IP portion of the loan, pay nothing on the ML portion and pay all that I can on the PPOR loan to reduce it down. As the loans are under the same bank I won't be capitalizing the interest on the IP sub account - I'd rather play it safe from an ATO part IV perspective.

Are these treated as sub-accounts or split loans as per Hart's case ?

Seems like the only variation is the ML.

Cheers,

Rob

 

[Boomer]

I'm not really sure what would differentiate a sub-account from a split loan but the portfolio loan has separate accounts, separate account numbers for each sub account, gives individual statments per account and can have different ownership per account (our IP is in my name all other accounts mine and my wifes).

 

[syba]

You can use your IP LOC to pay for expenses relating to your IP. You should never use your own money for costs relating to an IP, unless of course you don't own a PPOR.

 

[Boomer]

You can use your IP LOC to pay for expenses relating to your IP. You should never use your own money for costs relating to an IP, unless of course you don't own a PPOR.

Thanks, yeah this is pretty much what I'm planning to do. I'm not planning on letting the interest capitalize, just looking to pay expenses under the IP LOC account.

 

[Terryw]

Did you read bantacs newsletter from a few weeks ago? They applied for a private ruling on something similar this was disallowed. A copy of the ruling isn't available but the reasons given :

The denial of the deduction was based on the fact the LOC was secured by the home loan and when it was necessary to increase the limit on the LOC the bank would be approached to reduce the limit on the private home loan and increase the limit on the LOC. There was no floating cap or formal agreement with the bank that as one loan decreased the other could increase. Nevertheless, the ATO found that the loans were linked by common security. Thus comparing it to the linked loan in Hart’s case where it was found that it was a scheme caught by Part IVA as having the dominant purpose of a tax benefit.

 

[Boomer]

Eerily sounds like what I wanted to do apart from the fact that I am going to be paying the interest on the IP loan as it falls due and not letting it capitalize onto the loan whilst putting rental income into PPOR as in bantacs newsletter case.

Sounds like a bit of a mess then, if I wanted to for example pay for a new pergola for the rental property then this money couldn't come from the IP LOC? I know its not as simple as that, very much a grey area unless you have a PR.

 

[Terryw]

i wouldn't use that product. ideally you should probably have the LOC at a different bank to the investment loan. You should also get your own private ruling or run the risk of having it all disallowed later on.

 

[syba]

That's why you should never cross collateralise. The security for your IP loans should be your IP, and likewise for your PPOR. If you have them mixed up and you default on your IP loan, the bank can sell everything securing the loan until they get their money back (including your PPOR). Also avoids the situation Terryw mentioned above. Your loans don't have to be with different banks, but have to be totally separate to be safe - totally separate accounts held by differnt security. Being so called "linked" so you can access them all with online banking has nothing to do with it.

I think that case is the one known as "Hart's Test Case" or Hart v. Federal Commissioner of Taxation. Is a very interesting case.....

 

[Rolf Latham]

From my understanding, Harts vs ATO had the fundamental problem that ALL interest was capitalised to the investment property loan INCLUDING interest that was never deductible in nature to begin with................

The structure spoken of here appears to be different.

The comercial reasoning for a structure such as the one proposed might be to increase the borrowers capacity to further invest and thus, in the long term pay an increased amount of income or capital gains tax.

But Im not the tax office, nor a tax adviser.

ta
rolf

 

[Terryw]

That's why you should never cross collateralise. The security for your IP loans should be your IP, and likewise for your PPOR. If you have them mixed up and you default on your IP loan, the bank can sell everything securing the loan until they get their money back (including your PPOR). Also avoids the situation Terryw mentioned above. Your loans don't have to be with different banks, but have to be totally separate to be safe - totally separate accounts held by differnt security. Being so called "linked" so you can access them all with online banking has nothing to do with it.

I think that case is the one known as "Hart's Test Case" or Hart v. Federal Commissioner of Taxation. Is a very interesting case.....

Cross collateralising is not really the issue here - although the portfolio often requires all properties securing one big loan, this doesn't have to be the case.

The issue here is for it to try not to look like a scheme with the sole purpose of increasing deductions. Harts case is actually the case which defines what a scheme is. If you look up the definition of a scheme in a tax law book you will find the relevant quotes from the judgments in Harts.

Having the loans with the same bank under a split loan type arrangement looks kind of artificial - why have you set it up like this? If you had loans at different banks you would have a stronger argument - you can't afford to pay the interest at bank X, so you borrow from bank Y - only temporarily of course, until you can get back on track with the cashflow.

anyone trying to do something similar really should get advice from a tax pro as it could get thru for a few years and then the ATO may audit you are disallow it and you would then have to pay back the extra tax paid and maybe penalties as well - depending on how innocent your mistakes were.

 

[Rob G.]

From my understanding, Harts vs ATO had the fundamental problem that ALL interest was capitalised to the investment property loan INCLUDING interest that was never deductible in nature to begin with................

The structure spoken of here appears to be different.

The comercial reasoning for a structure such as the one proposed might be to increase the borrowers capacity to further invest and thus, in the long term pay an increased amount of income or capital gains tax.

But Im not the tax office, nor a tax adviser.

ta
rolf

My inquiry as to the linking of the loans was due to the original statement that "no payments would be made to the ML".

Therefore, **IF** we have capitalised interest on any investement account linked to a private account then we look remarkably like Hart's case.

Cheers,

Rob