Putting extra fund in IP loan to PPOR offset account

[bettedavis]

Hi All

I asked a question about financing my home the other day and now I have another one.

My bf has a home loan which is for our PPOR (title under my bf), and I just signed a new contract (soley under my name). We will move into the new home and rent out my bf property.

Unfortunately he was't smart enough to choose an offset account (i.e. loan with no offset account) when he bought his home.

So having read the answers I received in the forum about financing and with some research, we are considering;

(1) set up a loan with offset under my name for the new home purchase
(2) refinance my bf loan to have an offset account. The outstanding princial is 160k. Assuming we can get $330k from the refinancing, we can put $170k in his offset account.
(3) then trf the extra $170 into my offset account (for our PPOR) so that we don't pay any interest on our PPOR and get a full deduction on interest in my bf's IP.

So we went to my bf's accountant to discuss about it, and he said because we are refinancing my bf's to get the tax benefit, ATO may see it as a deliberate attempt to increase tax deduction????

I understand I cannot solely rely on any advice in this forum however the accountant does not seem to understand what offset account is, so would like to ask for how you guys are doing and second opinion.

Thanks in advance.

 

[alexlee]

So we went to my bf's accountant to discuss about it, and he said because we are refinancing my bf's to get the tax benefit, ATO may see it as a deliberate attempt to increase tax deduction????

I understand I cannot solely rely on any advice in this forum however the accountant does not seem to understand what offset account is, so would like to ask for how you guys are doing and second opinion.

Deductibility is based on what you use the proceeds for. In your case, you're using the 170k in new borrowings to reduce non-deductible interest. The interest on the 170k would not be deductible.

 

[Terry_w]

I agree with Alex

Its a clear case. BF would be borrowing to place money into an offset account on a PPOR loan. There is no basis to claim the interest on this loan.

 

[Rolf Latham]

Hi All

I asked a question about financing my home the other day and now I have another one.

My bf has a home loan which is for our PPOR (title under my bf), and I just signed a new contract (soley under my name). We will move into the new home and rent out my bf property.

Unfortunately he was't smart enough to choose an offset account (i.e. loan with no offset account) when he bought his home.

So having read the answers I received in the forum about financing and with some research, we are considering;

(1) set up a loan with offset under my name for the new home purchase
(2) refinance my bf loan to have an offset account. The outstanding princial is 160k. Assuming we can get $330k from the refinancing, we can put $170k in his offset account.
(3) then trf the extra $170 into my offset account (for our PPOR) so that we don't pay any interest on our PPOR and get a full deduction on interest in my bf's IP.

So we went to my bf's accountant to discuss about it, and he said because we are refinancing my bf's to get the tax benefit, ATO may see it as a deliberate attempt to increase tax deduction????

I understand I cannot solely rely on any advice in this forum however the accountant does not seem to understand what offset account is, so would like to ask for how you guys are doing and second opinion.

Thanks in advance.

one way thatmay work for you is a spousal sale or a sale to unit trust,which will partially or totally reset the dedns.

Dependin on the equity position you may be able to do a 105 % or so lend which would then be fully deductible

Costs like stamps will get in the way though, and so youd need to do a cost benefit analysis.


Dont be hard on the BFs choice of home loan, its a very very common issue.

ta

rolf

 

[bettedavis]

one way thatmay work for you is a spousal sale or a sale to unit trust,which will partially or totally reset the dedns.

Dependin on the equity position you may be able to do a 105 % or so lend which would then be fully deductible

Costs like stamps will get in the way though, and so youd need to do a cost benefit analysis.


Dont be hard on the BFs choice of home loan, its a very very common issue.

ta

rolf

Thanks All. Just out of curiousity, so would it be different if my bf had an offset account in the first place and just move around the excess fund to my offset account?

 

[Rolf Latham]

Thanks All. Just out of curiousity, so would it be different if my bf had an offset account in the first place and just move around the excess fund to my offset account?

yup

then the funds would be taxpaid cashand not borrowings..........and it would be all hunky from a tax POV

ta
rolf

 

[bettedavis]

yup

then the funds would be taxpaid cashand not borrowings..........and it would be all hunky from a tax POV

ta
rolf

Thanks again - now I can see the difference. I really have to spank my bf

 

[Rolf Latham]

I really have to spank my bf

um family friendly channel

ta
rolf

 

[BMan]

Thanks again - now I can see the difference. I really have to spank my bf

he hasnt done anything wrong as such just lack of knowledge
the good thing is that he has created equity that you could then draw down from and use to purchase another IP and it can then all be turned back into tax deductible debt

 

[bettedavis]

Two possible options?

Hi again.

So I came up with two options;

# Spousal sale

(1) My bf sells me 50% of his property (our PPOR at the moment but will become an IP. His outstanding loan on this property is $160k), appox 50%@$400k.
(2) I get a separate loan of $160k to fund the purchase, which I will claim deduction on interest payment.
(3) My bf will receive the cash proceed and deposit it into an offset account linked to our new property (title is soley under my name), which will be our PPOR.
(4) He still keep his outstanding loan of $160k, which he will claim dedution on interest payment.

Approx. stamp duty will be $6k and I will seek further advice on CGT from our accountant but I presume my bf wouldn't have to pay CGT at the moment (it has been his PPOR for 7 years).
I will have to pay CGT if we sell it later but I don't think we will make much CG from now on in the near future.
I am not sure whether my bf is required to pay off his existing loan with the sales proceed though.

# Refinancing my bf's loan

(1) Refinance my bf's loan with an offset account. Assuming the loan is $320k, the excess fund that he can get from the refinancing will be $160k.
(2) Put the excess fund into say 'IP cost account' (normal everyday account), from which we will pay IP interest payment and IP bills. (no personal bills and personal use)
(3) In the meantime, put all our salaries and rental income into our PPOR offset account until it pay off the PPOR loan.
(4) I presume we can claim tax deduction on interest on the $320k?

I am not sure whether ATO will question me it can amount to a scheme to avoid tax. I will also speak to our accountant but wondering whether anyone has a similar finance structure as above?

Since we will make a regular interest payment, I hope ATO won't say we are capitalising interest on interest?

Will at least one of them work? I appreciate your thought.

Thanks in advance.

 

[Rolf Latham]

Hi again.

So I came up with two options;

# Spousal sale

(1) My bf sells me 50% of his property (our PPOR at the moment but will become an IP. His outstanding loan on this property is $160k), appox 50%@$400k.
(2) I get a separate loan of $160k to fund the purchase, which I will claim deduction on interest payment.
(3) My bf will receive the cash proceed and deposit it into an offset account linked to our new property (title is soley under my name), which will be our PPOR.
(4) He still keep his outstanding loan of $160k, which he will claim dedution on interest payment.

Approx. stamp duty will be $6k and I will seek further advice on CGT from our accountant but I presume my bf wouldn't have to pay CGT at the moment (it has been his PPOR for 7 years).
I will have to pay CGT if we sell it later but I don't think we will make much CG from now on in the near future.
I am not sure whether my bf is required to pay off his existing loan with the sales proceed though.

# Refinancing my bf's loan

(1) Refinance my bf's loan with an offset account. Assuming the loan is $320k, the excess fund that he can get from the refinancing will be $160k.
(2) Put the excess fund into say 'IP cost account' (normal everyday account), from which we will pay IP interest payment and IP bills. (no personal bills and personal use)
(3) In the meantime, put all our salaries and rental income into our PPOR offset account until it pay off the PPOR loan.
(4) I presume we can claim tax deduction on interest on the $320k?

I am not sure whether ATO will question me it can amount to a scheme to avoid tax. I will also speak to our accountant but wondering whether anyone has a similar finance structure as above?

Since we will make a regular interest payment, I hope ATO won't say we are capitalising interest on interest?

Will at least one of them work? I appreciate your thought.

Thanks in advance.

Hiya

On the second scenario

1.Use a capitalising LOC for the unused portion, not an offset if at all possible
2. DONT cross collateralise the properties, otherwise you might end up with a "split loan" interpretation. Do NOT link a caoitalising LOC to the PPOR.
3. Seek specific tax advice

ta


rolf

 

[jrc77]

I am not sure whether ATO will question me it can amount to a scheme to avoid tax. I will also speak to our accountant but wondering whether anyone has a similar finance structure as above?

Since we will make a regular interest payment, I hope ATO won't say we are capitalising interest on interest?

Will at least one of them work? I appreciate your thought.

Thanks in advance.

As Rolf said, seek specific advice, however I found the following private binding ruling interesting reading.

http://www.ato.gov.au/corporate/content.aspx?doc=/rba/content/1011466416163.htm

Although a PBR can't be relied upon for anyone other than the applicant, I find them interesting to get an idea of the ATO's view on things (at the time of the ruling anyway!)

Regards,

Jason

 

[Terry_w]

Re Spousal Sale

It could be stamp duty exempt, depending on where the property is located.
But have to be careful with the transfer value if you want to claim the interest.
If he sells half the house then he would have to repay half the loan from a tax point of view.

 

[Terry_w]

Re the Refinancing

Seems like you want to borrow to place money into a savings account?? If so how could the interest be deductible?

If you refinance with a LOC on the new portion, the 'IP cost account', then use this to pay interest then you will be capitalising interest. ie you will be borrowing to pay interest.

What is your purpose in doing this?

 

[bettedavis]

Thanks to all for your answers.

Hi Terry.

We are in QLD. Any exemption applicable? As long as we use a market value (i.e. arm’s length value), I don’t think there will be any issue?

Regarding your question in refinancing, I want to source fund for IP cost from a loan linked to the IP rather than income from the IP. Then I can put the income into the offset account to save up cash to buy another IP while reducing interest on PPOR.

Thanks

 

[BMan]

best bet is for him to just sell the house and start fresh. put money into the offset account and but an IP. less messy that way.
sounds like you should really seek legal advice if pursuing your other options

 

[bettedavis]

best bet is for him to just sell the house and start fresh. put money into the offset account and but an IP. less messy that way.
sounds like you should really seek legal advice if pursuing your other options

Wish I can do that, but unfortunately it is not mine but my bf's, and he is not that finance savvy....

 

[bettedavis]

http://somersoft.com/forums/showthread.php?t=78625

I think this thread eventually answers my question regarding refinance.

I emailed a few accoutants about what they can offer and fee today but they didn't sound promising (one of them asked me back what PPOR stands for)

So I was planning to apply for PBR then found the above thread. My situation seems to be what TD2012/1 describes so I better go with a spousal sale.

BTW can someone please explain to me what the situation described in item 7 means?

There are many circumstances where capitalised interest may well be tax deductible but in view of the approach taken in TD 2012/1 you should still apply for a ruling. Here are some situations where it would be nice to have a statement from the ATO.

.........

7. If you have sufficient equity in assets other than your home to finance the growing LOC debt then the concept of paying off your home sooner has much more punch. You dominant purpose could be to make sure that only your rental properties are exposed to risk of mortgage repossession.



Thanks

 

[Terry_w]

I am guessing, but it could mean that instead of securing debt on the home you have the aim to secure debt against an investment property(ies). ie shifting the risk.