Redraw/Deductibility issue - please HELP!

[Stark100]

Hi all,

I am a long time Somersoft lurker, first time poster. I am hoping there is a way out of the following predicament:

I purchased my first property in January this year - currently my PPOR. Loan is with ING, I have a redraw (not offset) facility. At the time I was not aware of the potential tax implications of a redraw vs offset facility - my mistake, and not something the broker that I used ever highlighted as a consideration.

Initial loan amount - $515k - and in the last 8 months I have made frequent use of the redraw facility to park and then draw down on surplus funds as required - in total I have redrawn $180k (I know, seems a lot but not pertinent - and none of these funds were used for investment purposes) - with $105k currently sitting against the loan and available for redraw.

I am now looking to purchase a second property, with this becoming my PPOR and the current property becoming an IP - and will need to redraw the $105k to finance this. My new (much more on the ball!) broker has advised the issue around deductibilty of redrawn funds - i.e. the way it looks at the moment, as I have redrawn a total of $180k already, and another $105k pending for the new purchase, is that $285k of my current loan will not be deductible when my current PPOR becomes an IP. This is a pretty disasterous situation for me, and effectively kills my plans to purchase another property as cashflow will be seriously impacted by the non-deductible portion of the loan. I have researched this here on Somersoft - the only possible ray of light may be the use of a trust - but not sure whether this is an option for me - can I put current PPOR (soon to be IP) into a trust and then still negative gear? At a minimum guess I'd be looking at stamp duty on this kind of transfer?

Any thoughts/ideas would be very much appreciated!

 

[Rolf Latham]

Welcome

Ouch ....................

Much depends on what ur accountant has to say.

Number of ways to get the same end result.

Whats your taxable income pls, and is the property owned in only one name ?

How much equity will you have left over to play with ?

ta
rolf

 

[julia]

Go to www.bantacs.com.au under freebies have a look at the claimable loans booklet in particular the paragraph startin with it is danerous. Yep that is the one that refers to you.

Also in the next few days under out tools section well will be posting a spreadsheet that will help you apportion the loan

 

[Stark100]

Hi Rolf - taxable income for 08/09 was $135k - varies a little year to year based on dividends, etc. Equity - not much in the current property - value is probably about $560k, with $515k loan owing. It was a 95% lend plus LMI capitalized - just before most lenders stopped doing them...

Hi Julia - yes I have read the relevant section in that booklet - it was referenced in another thread - appreciate this fits the bill for me - I am just hoping there is some way out of this mess!

Thanks for the replies...

 

[Rolf Latham]

Hiya Stark

Bugger, so the plan to recycle debt will take much much longer than id hoped. The income is good, but the equity position is light on for capitalising investment interest. However if you choose the right product, the debt recycle strategy could still work for you .

U could sell to a unit trust, BUT in doing so need stamps, LMI etc and the chances of getting it done from a lenders point of view is probably impossible. In addition,many accountants dont like it one bit.

Your case is just another clear example that brokers do need more broad based education. Having said that, 90 % of bank staff and direct loan product sellers arent any better in this regard. Asking what you will do with the property mid to long term is one of the first product need determinants in my view.

ta
rolf

 

[Rob G.]

can I put current PPOR (soon to be IP) into a trust and then still negative gear?

Your fundamental problem with negative gearing is that the debt needs to be in an individual's name because the trust cannot negative gear !

Yet your debt is mixed purpose and cannot be reset.

So if you assign the unencumbered property to a unit trust (or HDT) in consideration for all the units entitling you to all income/CG from that property you are no better off.

Some advocate selling to a spouse, but again tread carefully because of Part IVA tax avoidance.

Cheers,

Rob

 

[Stark100]

Hi Rolf - debt recycling - how would that work - and would this be something an accountant would advise me on, or something a broker could help with? What LVR would I need to be looking at for this to be a serious option?

Your thoughts on a couple of other things would be much appreciated:

1. I redrew $100,000k to lend to a family member for a (very) short term loan - this was repaid with a small amount of interest - could this be deemed as being for investment purposes and therefore deductible?
2. The $105k currently sitting against the loan - if I treat my next purchase as an IP, and have it tenanted for say, 6 months - does this get around the issue, or once it becomes my PPOR am I in the same non-deductible boat again?

The broker in question works as an independent for a small 'property investment and strategy' firm - hence I am completely incredulous as to how this was the product he recommended, without any warning as to potential redraw implications...

Rob G - thanks for the info - trust looks like a non-starter and I have no spouse to sell to just yet

I know this is a naive question - but how would the ATO know about the redraw situation - i.e. if I simply redrew all cash before the next purchase. I know this is breaking the law, not suggesting it as an option, just wondering how they would find out...

 

[The Y-man]

I know this is a naive question - but how would the ATO know about the redraw situation - i.e. if I simply redrew all cash before the next purchase. I know this is breaking the law, not suggesting it as an option, just wondering how they would find out...

I assume you lodged a tax file number against the account - which means an auditor will have access to the transactions.... even if you didn't, it'd be pretty easy work from a forensic point of view.

Cheers,

The Y-man

 

[The Y-man]

Stark,

This might sound extreme, but how about selling your current property before moving into the PPOR you want, THEN look at a different IP after that? Assuming you can do it all at a profit of course - remeber that the profit on your PPOR will be essentially "tax free".

Cheers,

The Y-man

 

[Stark100]

Well, profit would be minimal at this stage as I've only owned the property for 8 months - and it was a tough one to find, as I believe it has good CG potential and was meant to be my first IP - the starting point for my investment portfolio going forward... To get myself back to another IP and PPOR I've then got the whole set of purchase costs, stam duty, etc to go through again...

 

[Stark100]

Ran the numbers this evening based on anticipated rental income, deductions etc and because of this 'mishap' I would be an additional $5,500 pa out of pocket... in after tax dollars... at a 5% SVR - never mind when it heads up to 7+%... what a disaster.

Be interested to hear more about debt recycling option mentioned by Rolf and what exactly would be involved - realise might not be an option straight away due to current low equity, but maybe in a few years?

 

[Rolf Latham]

Hiya Stark

the most simple lo profile form of debt recycle is to capitalise the Interest and costs of your IP, while paying down your Non dedutible debt.

With skinny equity this can still work, but needs a product that allows quick and easy "limit rebalancing"

If you have a bit more equity and are ok with the share market, you can use some equity to buy income producing funds with the spare equity, capitalise the interest for these purchases, and make use of the income generated to reduce the non ded side of your loans.

ta
rolf

 

[Stark100]

Thanks Rolf - appreciate your help. Starting to make sense I think... where to from here though - would a broker be my best port of call to look at options/suitable products (due you mean an LOC of some sort or would I have to refi to some other type of loan?). Guessing that to turn that $200k+ plus of non deductible debt into deductible debt may take a good few years, and some risk if using shares for income.

 

[traveller]

Hiya Stark

If you have a bit more equity and are ok with the share market, you can use some equity to buy income producing funds with the spare equity, capitalise the interest for these purchases, and make use of the income generated to reduce the non ded side of your loans.

ta
rolf

Hi Rolf,

Wont the above fail the test where an arrangement is being made to just avoid tax.

What other benefit is being derived from the above arrangement vs where the income generated is used to pay off the investment loan expenses/principal?

 

[Rolf Latham]

Hi Traveller

Interest Capitalisation has been discussed here for a while, and properly structured and used the user should be fine. There are quite a few indications that this will be cool including direct examples such as margin lends, businesses that do the same, recent tax rulings that touch on this subject, and the occasional PBR that some users have obtained from the ATO.

User has to be comfortable, as does their tax advisor.

The END game is to increase cashflow so you can purchase more income producing assets faster so you can pay more income tax in the future. A sided benefit of that is the redn of the NDD burden.

ta
rolf