Redraw facility

From: Lotana Von Amor


Hi,

What do the experts think about deductibility of the interest in the following scenario:

I buy an IP for $200K all up (inc costs) borrowing $120K int only. In few years time the IP is worth (bank valuation) say $250. I refinance gearing it up to 80% LVR or $200K, draw additional $80K and spend the money for personal purposes. Would the interest I pay on the additional $80K borrowed be tax-deductible? I am aware of two points of view:

1. My accountant answers "yes". Interest on additional drawings up to the original purchase price plus cost is deductible. And I like that!

2. Some of my friends disagree and in fact left this accountant to exercise more conservative approach were deductibility of interest for each drawing is determined by the purpose of this particular drawing. Therefore not only interest on $80K in the example is not allowed as a deduction, but even if I paid extra $10K before refinancing and wanted to redraw it I would need to use the money for income-generating purposes before I could claim interest as a deduction.

Could the experts shed some light on this one please?

Regards,

Lotana
 
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Reply: 1
From: Dale Gatherum-Goss


Hi

Your accountant is wrong. You cannot reborrow money and claim the interest as a tax deduction in this scenario because the tax office look at the purpose of the borrowing which, in your case, is for personal purposes.

Please be very careful.

Dale
 
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Reply: 2
From: Ian Findlay


Get a new accountantant.

Its the purpose of the money thats the issue. If the purpose of the money is
"personal" then not deductible. IF it is used for income producing asset
then yes.

Point of view 2 is correct.

Ian

> From: "Lotana Von Amor" <analysts@fitbits.com.au>
>
> Hi,
>
> What do the experts think about deductibility of the interest in the
following scenario:
>
> I buy an IP for $200K all up (inc costs) borrowing $120K int only. In few
years time the IP is worth (bank valuation) say $250. I refinance gearing it
up to 80% LVR or $200K, draw additional $80K and spend the money for
personal purposes. Would the interest I pay on the additional $80K borrowed
be tax-deductible? I am aware of two points of view:
>
> 1. My accountant answers "yes". Interest on additional drawings up to the
original purchase price plus cost is deductible. And I like that!
>
> 2. Some of my friends disagree and in fact left this accountant to
exercise more conservative approach were deductibility of interest for each
drawing is determined by the purpose of this particular drawing. Therefore
not only interest on $80K in the example is not allowed as a deduction, but
even if I paid extra $10K before refinancing and wanted to redraw it I would
need to use the money for income-generating purposes before I could claim
interest as a deduction.
>
> Could the experts shed some light on this one please?
>
> Regards,
>
> Lotana
>
>
>
> To reply: mailto:propertyforum.27886@bne003w.webcentral.com.au
> To start a new topic: mailto:propertyforum@bne003w.webcentral.com.au
> To login: http://bne003w.webcentral.com.au:80/~wb013
>
 
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Reply: 2.1
From: Kevin Forster



This, to me, seems like a fairly elementary question for an accountant to answer.

If an accountant has got this wrong, they are incompetent or else the question was incorrectly phrased to make the accountant assume that you were redrawing for investment purposes.
 
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Reply: 2.1.1
From: Paul Zagoridis


Now if the IP was owned by an entity or a partner, AND you loaned them the deposit and legals and purchase expenses (document it).

Then interest on the refinanced drawdown is deductible because it is swapping one form of debt to another. But you didn't charge interest? Zero interest loans can be commercial in the right circumstances.

I would never use my own money as a deposit and legals. I always get a loan from family, friends or a credit card and it stays on the balance sheet.

Paul Zag
Dreamspinner
The Oz Film Biz site is archived at...
http://wealthesteem.dyndns.org/
 
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Reply: 1.1
From: Michele B


Dale
Hmmmmm. I'm told you can no longer refi an IP, use the proceeds for further IP investment and claim the interest, because the ATO sees this as giving you two bites of the same sticky bun. Can you please shed a bit of light on this for us?

michele
 
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Reply: 2.1.1.1
From: Michele B



>Then interest on the
>refinanced drawdown is
>deductible because it is
>swapping one form of debt to
>another. But you didn't charge
>interest? Zero interest loans
>can be commercial in the right
>circumstances.

Paul can you please expand on this a little, esp re my question to Dale above??

michele
 
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Reply: 1.1.1
From: Dale Gatherum-Goss


Hi Michele

Yes, you can refinance an investment property and use the new loan to buy a second property and still be able to use the redrawn interest as a tax deduction.

If you used the redrawn funds for personal reasons, you could not claim the interest as a tax deduction.

Does this help?

Dale
 
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Reply: 2.1.1.1.1
From: Rolf Latham


You can claim anything you like.

Just expect it to be disallowed with penalty interest at audit time

Ta


Rolf
 
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Reply: 2.1.1.1.2
From: Paul Zagoridis


Refinancing an asset and investing the proceeds? In most cases I think the interest would be deductible.

If you had $50K lying around and bought an IP then refinanced the IP to get your $50K back. No interest deductibility unless you
"invested" the 50K. Tough luck if the money came from your education, holiday or wedding fund.

Say you buy a $50K IP on a credit card at 16%p.a. Your interest is normally deductible. You then renovate, revalue and refinance with a standard first mortgage (after the first lease expires). Your new borrowings are at say 6% the IP is worth $100K at a 50% LVR you borrow $50K. Pay out the amount on your credit card with the proceeds of the mortgage funds. Interest is still deductible.

Now you say IP's in Sydney cost more than $50K? That's ok. Could you borrow your deposit and acquisition expenses from your credit card? Say $50K? Then when you "top up" your mortgage you pay out your expensive borrowings.

Don't have enough credit cards to get to $50K (do you live under a rock [cheeky grin])? Can you take a loan on your car? Personal loan? Pay day advance?

If you intend to refinance your deposit back out of the deal don't put it in as equity in the first place. Put it as debt (secured or unsecured).

Does this make sense?

On 3/26/02 12:32:00 PM, Michele B wrote:
>
>>Then interest on the
>>refinanced drawdown is
>>deductible because it is
>>swapping one form of debt to
>>another. But you didn't charge
>>interest? Zero interest loans
>>can be commercial in the right
>>circumstances.
>
>Paul can you please expand on
>this a little, esp re my
>question to Dale above??
>
>michele



Dreamspinner
The Oz Film Biz site is archived at...
http://wealthesteem.dyndns.org/
 
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Reply: 2.1.1.1.2.1
From: Michele B


Good. Thankyou Dale and Paul!
Here's a real life query related to the above. Maybe you can offer a suggestion esp as I doubt I'm the only one with this dilemma.

Property 1 is an IP with equity. Property 2 is also an IP but I'd like to make it my PPOR. What I want to do in effect is move the equity I have in P1 into P2 so P2 has minimal debt when I move in, the interest no longer being deductible.

Since I can't seem to make this work properly as a straight refi - I've done lots of little drawings with arrows, you know, being a designer and all - maybe there's a simple but creative PZ way of doing this :) Or do I just sell P1 to another entity to access the cash? Later I'll use P2 to secure further IP loans.

michele
 
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Reply: 3
From: Lotana Von Amor


Thank you all.

I am going to talk to my accountant tomorrow. He is a very smart chap, runs a busy practice and develops small projects at the same time. I can't wait to hear what he says - he must know the trick. Promiss to share it with the forum.

Cheers,
Lotana
 
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Reply: 3.1
From: Lotana Von Amor


Ok, after talking to my accountant and reading the ATOs web site I am convinced that if you bought an IP with some funds borrowed from a bank and the remainder "borrowed" from a friend or relative interest free, and then refinanced (up to the original purchase price + costs) the interest is claimable.

Here is the link to ATO's Interpretative Decision "Deductions and expenses: Interest on Loan to Refinance an investment property."

http://law.ato.gov.au/atolaw/view.htm?locid='aid/aid200132

Cheers,

Lotana
 
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