PPOR to IP structure correct?

[dagg3r]

Hi guys, just got a quick question.

say I had a PPOR initally a loan of $220k and I had paid off 74k thus 146k is owing.

If this PPOR is now an investment property, now rented out, which i have topped up the loan to 288k, and used that 74k to purchase another investment property.

I now have 68k from the topup which is deposited into my offset account.

I assume the interest on the 288k is entirely deductible? just confused about the portion of the topup how that fits in.

Cheers

 

[Terryw]

Without knowing your full situation, I would say the $146,000 is probably deductible against IP1.

$74,000 would probably be deductible against IP2.

The interest on the rest may, or may not be deductible. If you have borrowed to put in an offset account against another property, then the interest probably wouldn't be deductible.

 

[dagg3r]

since the banks gave me a lump sum of 141k, (67k + 74k) into my offset account (which is linked to ip1) , i used 74k to cover the costs of the ip2. Now my bank statement has ip1 loan of 288k owing.

Can I assume the interest on the 288k is tax deductible? since 68k from the topup was used and the additional was from my own redraw money?

obviously the interest wont be 288 as there is cash in the offset account.

Cheers

 

[Terryw]

since the banks gave me a lump sum of 141k, (67k + 74k) into my offset account (which is linked to ip1) , i used 74k to cover the costs of the ip2. Now my bank statement has ip1 loan of 288k owing.

Can I assume the interest on the 288k is tax deductible? since 68k from the topup was used and the additional was from my own redraw money?

obviously the interest wont be 288 as there is cash in the offset account.

Cheers

You cannot assume that.

You have borrowed in part to invest into an offset account. No interest is being charged on the loan now, but if you take money out of the account then it will.

Did or Does the offset account contain any other funds? If so, in the future how do you distinguish which funds you will be withdrawing?

 

[dagg3r]

yes the offset account contains other funds, not sure what should I do to uncontaminate the funds...

 

[Terryw]

It will be very hard. Like mixing coke and orange juice!

 

[dagg3r]

hmm this is interesting, i asked my mate whos an accountant, he told me because the banks closed my old home loan, gave me a new one for "investment" with a diff account number the total owing is 288k, and is tied to the security of my investment property the purpose of the funds was for investment hence if its a rental property the total 288k interest is tax deductible?

that doesnt sound right thanks for the help terry.

 

[Terryw]

hmm this is interesting, i asked my mate whos an accountant, he told me because the banks closed my old home loan, gave me a new one for "investment" with a diff account number the total owing is 288k, and is tied to the security of my investment property the purpose of the funds was for investment hence if its a rental property the total 288k interest is tax deductible?

that doesnt sound right thanks for the help terry.

Your mate doesn't know much about tax then!

The deductibility of an outgoing is determined by its essential character ( Lunney & Hayley v. Federal Commissioner of Taxation (1958) 100 CLR 478; (1958) 11 ATD 404; (1958) 7 AITR 166).

4. The character of interest is determined by the reason it arises, which is usually determined by the purpose to which the borrowing is being applied when the interest arises. Generally, the purpose of a borrowing can be determined from the use of borrowed funds and outgoings of interest ordinarily draw their character from that use ( Fletcher v. Federal Commissioner of Taxation (Fletcher ) (1991) 173 CLR 1; 91 ATC 4950; (1991) 22 ATR 613; Kidston Goldmines Ltd v. Federal Commissioner of Taxation (Kidston ) (1991) 30 FCR 77; 91 ATC 4538; (1991) 22 ATR 168).

5. Accordingly, a deduction is generally allowed for ordinary interest incurred on funds borrowed that are used to acquire an income producing asset.

From TD 2008/27

What this boils down to is it is the purpose for which the borrowed funds were used that determines whether the interest is deductible.

 

[Rolf Latham]

ouch : (

what other funds are in the offset other than borrowings ?

ta'rolf

 

[dagg3r]

just cash in an offset account to offset interest just sits there.. lol

 

[Rolf Latham]

ok

there are 2 types of cash

saved cash that you have paid tax on

and

borrowed cash


mixing them in the same offset account makes for an interesting catalytic reaction re the ato

ta
rolf

 

[dagg3r]

so for ATO purposes should I transfer the remaining funds that was borrowed money into another account for tax purposes? I assume i calculate this myself.

 

[Rolf Latham]

dunno............Im not an accountant

I think the milk is spilled

ta
rolf

 

[Brett IP]

Would definitely have been best to find out the ATO rules for certain, not "assuming" or asking a mate, and have seen an accountant before taking action.

Doesnt sound like too much of a mess though, so go and see an accountant before it gets worse and to make sure you are on the right track.

 

[coastymike]

http://law.ato.gov.au/atolaw/view.htm?locid='TXR/TR936/NAT/ATO

TR 93/6 Loan Offset Arrangements

 

[Mom]

PPOR to be IP & Purchase new PPOR

Dear All,

I'm considering of buying New PPOR but considering keeping the old PPOR as IP. Could you give me a guidance on how to do this correctly? Can I do valuation so later on I can proportionate CGT? I meant for the years I used the old property as PPOR?

Thank you in advance for your suggestion.