Question about loan contamination, (or rather current account contamination?).

Hi all,

We are in the middle of sorting out finance for our first Australian IP.

We are using some equity from our PPOR to put down a 20% deposit & cover costs, and the remaining 80% will come from the new loan against the IP.

Effectively we'll be borrowing 100% + costs this way, so we can maximize the tax deduction for the loan.

Initially, we were going to split the existing home loan to create the 20% investment part, and a new loan for 80%. The mortgage assessor called me yesterday and advised that we make the new loan for the whole 100% (still secured partly against the PPOR to access the equity). The reason for this was so that we don't loose the preferential interest rate for 1st home borrow on our PPOR. She said if we split that loan, we'd loose the preferential rate on the PPOR part.

So, sounds ok to me so far - end result is still the same, one new loan for 100% +costs, partly secured against the PPOR to enable us to not have to use our savings and be able offset all for tax, plus no LMI to worry about on the new place.

I had read a little about loan contamination regarding tax, so have a question.

The new loan is straight forward it will be a new account with an interest only repayment to make each month. Our PPOR loan is part of a 100% offset account.

Is it acceptable to have the rent from the IP paid into our current account that offsets against our PPOR, then deduct the whole interest amount from our tax return for the IP loan? Or, do we have to set up a new current account for the IP rent to be paid into so that any interest that the rent makes can be assessed against the IP loan itself? We're only talking tiny numbers here, but want to make sure we have things set up properly.

Thanks.
 
Initially, we were going to split the existing home loan to create the 20% investment part, and a new loan for 80%. The mortgage assessor called me yesterday and advised that we make the new loan for the whole 100% (still secured partly against the PPOR to access the equity). The reason for this was so that we don't loose the preferential interest rate for 1st home borrow on our PPOR. She said if we split that loan, we'd loose the preferential rate on the PPOR part.

This is cross collaterisation. Have a read of other threads about it and beware of the consequences.

Is it acceptable to have the rent from the IP paid into our current account that offsets against our PPOR, then deduct the whole interest amount from our tax return for the IP loan? Or, do we have to set up a new current account for the IP rent to be paid into so that any interest that the rent makes can be assessed against the IP loan itself? We're only talking tiny numbers here, but want to make sure we have things set up properly.

Thanks.

Should be fine as long as you aren't capitalising the interest on the IP.

Regards,

Jason
 
Thanks for the reply.

I’ll have a search for cross-collateralizing at lunch time. Do you think it would be better to split the existing loan then, so that each loan is for the respective house that it is secured on?

Can I ask what you mean by capitalizing the interest?

Cheers.
 
Hi,

Most useful thread, on capitalising interest (now closed thread) is by S.S. member Corsa.
Try running a search on Interest on Interest it should come up! Sory can't seem to link it!
She also started a thread dealing with the A.T.O's draft ruling on the same topic.
Hope you have a while to read!:D
Also think Rixter has had a bit to say on topic. Happy researching!

FWIW I'm in the don't X coll unless you have to camp. Oh how I wish someone told me that and WHY, years ago!
 
OK, so I found & read Corsa's thread. I kind of got the gist of it, but not sure how it applies to a fairly straight forward offset account scenario.

Having read about X-Col, I can also see why people recommend not going down that route if possible.

So, at the moment, I think my situation would be, and please let me know if I would be doing something fundamentally wrong here:-


Current situation:-

PPOR Loan (Offset) - for our current PPOR
Offset account - gets both our wages paid into & pays all our bills & mortgage etc


Possible new set-up:-

PPOR Loan (Offset) - for our current PPOR
SPLIT I/O from PPOR LOAN (not offset) - secured against PPOR but for 'INVESTMENT PURPOSES'
New Loan - I/O secured against the IP. Interest payments paid from the Offset account.
Offset account - gets wages & rent paid into & pays out all bills, including all loan payments but only offsets against original PPOR loan


Would that mean that because the loan split is for investment it is tax deductible, but even though it is for a deposit on the IP and secured against the PPOR it is not Xcol?

Is there any reason why there would be a problem in paying the rent into the Offset account linked to the PPOR and not linked to the I/O split?

The investment loan repayments would be met each month, so no capitalizing?

If the above scenario is correct, is there any reason that it can't be kept going more or less indefinately, (serviceability allowing) i.e. split another loan from PPOR when equity allows and borrow new loan for IP3, or split IP2 loan for deposit for IP3 - all the while making all rent income and all bills paid out form the one Offset account and keeping Xcol out of the picture? I realise I'd have to keep a good record of the Offset accounts in & outs for tax time, but I don't see that being a great deal more difficult than if they were in separate accounts.

Thanks for any feedback.
 
I'm keen to know the answer to this one too.. I'd recommend getting advice from your accountant before starting up a loan structure that could be wrong.

At a guess (don't take this as advice), I think the loans will be x-coll, as they are split loans from mixed securities. The wording in the loan contract will confirm this.

I think its a good idea offsetting as much income from your non-deductible PPOR debt, but I'd be checking with the accountant or giving ATO a call about that one too.
 
You can do with the rental income what you wish. You can put it into your offset, you can put it on the PPOR loan, you can even spend it on a nice holiday. It is yours, the same as your PAYG income. Just make sure you declare it on your tax return and make the relevant payments on your loans.
 
Thanks - thought that would be the case.

The bank have just been on and conditionally approved the loan, yay!

Just got to send some supporting docs off to them to tie it all up.

I told them we didn't want to xcol so could we take a split draw against the PPOR and a seperate loan for the difference on the IP - she said it would be no problem, just got to wait for the reval on the PPOR and then do some more sums and then we can go house shopping.
 
OK, so I found & read Corsa's thread. I kind of got the gist of it, but not sure how it applies to a fairly straight forward offset account scenario.

Having read about X-Col, I can also see why people recommend not going down that route if possible.

So, at the moment, I think my situation would be, and please let me know if I would be doing something fundamentally wrong here:-


Current situation:-

PPOR Loan (Offset) - for our current PPOR
Offset account - gets both our wages paid into & pays all our bills & mortgage etc


Possible new set-up:-

PPOR Loan (Offset) - for our current PPOR
SPLIT I/O from PPOR LOAN (not offset) - secured against PPOR but for 'INVESTMENT PURPOSES'
New Loan - I/O secured against the IP. Interest payments paid from the Offset account.
Offset account - gets wages & rent paid into & pays out all bills, including all loan payments but only offsets against original PPOR loan


Would that mean that because the loan split is for investment it is tax deductible, but even though it is for a deposit on the IP and secured against the PPOR it is not Xcol?

Is there any reason why there would be a problem in paying the rent into the Offset account linked to the PPOR and not linked to the I/O split?

The investment loan repayments would be met each month, so no capitalizing?

If the above scenario is correct, is there any reason that it can't be kept going more or less indefinately, (serviceability allowing) i.e. split another loan from PPOR when equity allows and borrow new loan for IP3, or split IP2 loan for deposit for IP3 - all the while making all rent income and all bills paid out form the one Offset account and keeping Xcol out of the picture? I realise I'd have to keep a good record of the Offset accounts in & outs for tax time, but I don't see that being a great deal more difficult than if they were in separate accounts.

Thanks for any feedback.

That sounds like a good way to do things. You could perhaps improve it by looking at paying IP bills and expenses from the IP split too, ie borrowing, and then using the cash saved to improve your offset balance and save you more interest.

No real reason why you can't continue like this assuming your properties are constantly growing and you can keep on servicing.
 
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