Redraw/Interest/Tax

From: Geoff Donges



G'day all,
After a recent thread in regard to LOC's & interest/tax, I was wondering if someone could tell me exactly how this goes. (I'm a bit thick :eek:))
Some time ago I posted a question asking if I could claim the interest on a redraw from my PPOR loan for the deposit & costs of my 1st IP. The loan was down to less than $50 owing & the answer was yes.
I purchased that 1st IP in December. A bit later, with a small amount of extra cash that was to be used at a later date to pay for carpeting PPOR, I put it down on the IP loan. At 5.95% I was thinking that was pretty good.
I've been thinking about this & surely I can't have it both ways. If I redraw that money from the IP loan what are the tax implications? I.E:
I can REDRAW from PPOR loan for IP deposit & costs, which would make the interest tax deductible.
If I REDRAW from my IP loan for something personal, even though I'd put in that extra money ??????
Without thinking about it, I would normally have just put in extra amounts into IP loan every now & then, redrawing when needed, like a bank account. The interest would be more after the redraw but no more than if I had not put in the extra money. I would simply have just claimed all the interest on the IP loan as tax deductible.
I'm now thinking this could get me into trouble if/when audited if I did that.
If that is correct then I'll have to forget that extra money & make no redraws on the IP loan so I don't complicate the tax issue. Yes / No ?
Any opinions are most welcome. Thanks.
 
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Reply: 1
From: Dale Gatherum-Goss


Hi Geoff!

If you redraw money from your LOC to use for further IP's, the interest on the redraw is tax deductible.

However, if you redraw money from your LOC for personal reasons, the interest on the redraw is NOT tax deductible.

The tax office will effectively "follow the money".

I hope that this helps

Dale
 
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Reply: 2
From: Geoff Whitfield


Geoff,

If your going to use your redraw for personal, have another account. Be very strict about only using one account for personal stuff, the other for deductible stuff (It doesn't have to be deductible just for IPs). Otherwise tax time becomes a nightmare.
 
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Reply: 2.1
From: Geoff Donges



Thanks for the replies Dale, Geoff.
I'm still not absolutely clear on this. I do NOT have a LOC. I'm talking about redrawing cash that I have put into the loan over & above the minimum monthly amount.
It is an investment loan with Aussie with a no cost redraw facility. So, when I put extra money into that loan, the amount of interest charged comes down. If I redraw that money, then the interest goes back up.
Are you saying I can't claim that amount of interest in my tax if I use the redraw for other purposes than investing? It would need to be kept separate?
Someone said this to me on the subject:
"INTEREST on the LOAN you took to buy your investment is TAX DEDUCTIBLE.
Whether you are paying $50 p/m or $1000p/m in INTEREST, it doesn't matter, its deductible. The fact that you have money in a redraw facility only reduces the interest that you have to pay on your LOAN. When you withdraw that money it is your money. YOU are not borrowing this money it is yours. If you take it all out you have not borrowed anymore money. YOUR original loan still stands, you are still paying TAX DEDUCTIBLE INTEREST on you investment LOAN."
Is this wrong?
And if not, how could the same type of redraw from my original ppor loan to pay for the deposit & costs of the IP be tax deductible?
I seem to be having trouble putting my questions into words. Hope this is clear enough.
Thanks.
 
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Reply: 2.1.1
From: Robert Forward



Hi Geoff

>Someone said this to me on the
>subject:
>"INTEREST on the LOAN you took to buy your >investment is TAX DEDUCTIBLE.
>Whether you are paying $50 p/m
>or $1000p/m in INTEREST, it doesn't matter, >its deductible. The fact that you
>have money in a redraw facility only >reduces the interest that you have to pay
>on your LOAN. When you withdraw that money >it is your money. YOU are not borrowing
>this money it is yours. If you take it all >out you have not borrowed anymore money. >YOUR original loan still stands, you are >still paying TAX DEDUCTIBLE INTEREST on you
>investment LOAN."Is this wrong?

It reads to me as wrong, was this person that told you this an accountant, sales person or a friend?

>And if not, how could the same
>type of redraw from my original ppor loan >to pay for the deposit & costs of the IP
>be tax deductible?

This money would be tax deductible as it is taken out for investing purposes.


Once you put monies into the Loan the ATO will see that you've paid off the debt. So once you turn around and withdraw money out of this loan it is not considered as a withdrawal that you are allowed to claim as taxable.

Just because you have a loan on an IP doesn't mean that the money can be used for anything. The ATO specify that it comes down to "What the money is used for" not what is secured for you to obtain the money. If you were to withdraw from the loan to buy shares or another house (or any investing stuff) then it would still be tax deductable. If however you withdrew the money for a holiday or groceries, the answer as far as the ATO would see it is that is personal spending and thus NOT claimable.

You'll need to remember that it's what the money is used for that makes it either claimable or not.

I hope this clears the issue from mud to murky water for you.

DISCLAIMER: But please let me also say that this is NOT advise and you need to speak with a qualified accountant about your issue.


Cheers
Robert

Property Inspection Reports @
http://www.creativefinance.com.au

The Sydney "Freestylers" Group Leader.
 
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Reply: 2.1.1.1
From: Dale Gatherum-Goss


Hi Robert! Hi Geoff!

You are right in what you say. Geoff, be careful and have along chat with your accountant.

Dale
 
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Reply: 2.1.1.1.1
From: Rolf Latham


Hi all

Really Really simple solution to prevent this in the first place.

Use a product with an offset facility.

Your spare cash is parked in the offset and works on the loan interest in the same way as having it sitting in the loan directly.

Difference is when you then move the cash from the offset for a Non deductible purpose, the original loan amount remains largely unaffected and the there is zero confusion.

Could be a case of the horse has bolted here - but for future reference.

Ta

Rolf
 
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Reply: 2.1.1.1.1.1
From: Always Learning


So let me check my understanding.

Buy IP for 200K, obtain a 150K interest only with "lump sum" principle repayment option plus mortgage offset account.

<ol>
<li> 3 years latter house is worth $250K loan $150K. Refinance for $200K, use $50K cash for purchase of another investment property. For the ATO the first $50K of the $200K loan is: 100% tax deductible.
<li> 3 years latter house is worth $250K loan $150K. Refinance for $200K, spend $50K on a pool and tennis court at your PPOR.
For the ATO the first $50K of the 200K loan is: 100% not tax deductible.
<li> 3 years latter house is worth $250K, but you have paid a principle lump sum of $10K in year 2 loan now $140K. Using "Mortgage Redraw" facility take out $10K and spend it on a Rolex watch.
For the ATO the first $10K of the $150K loan is: 100% not tax deductible
<li> 3 years latter house is worth $250K, but you have paid into a mortgage offset account a lump sum of $10K in year 2, loan remains $150K but you are paying interest on only $140K. Withdraw $10K from offset account, spend it on a Rolex watch. For the ATO the first 10K of the $150K loan is: 100% tax deductible.
</ol>
<p>
Given item (3) is correct Always Learning now requests someone to spank my bottom with a wooden hair brush whilst saying "Who's a stupid boy, never pay down capital on a IP"! :)
<p>
 
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Reply: 2.1.1.1.1.1.1
From: Rolf Latham


Hi Al

An Oyster was it ? Number 4 holds nicely with the ATO

Ta

Rolf
 
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Reply: 2.1.1.1.1.1.2
From: Dale Gatherum-Goss


Hi AL

You wrote: "Given item (3) is correct Always Learning now requests someone to spank my bottom with a wooden hair brush whilst saying "Who's a stupid boy, never pay down capital on a IP"! :)"

You deserve two punishments. One for the above, and one for not asking "respectfully"
Now, so that we can do this properly . . . are you male or female? The people offering to do the spanking may have a preference.

Oh, and remember, after each stroke, it will be wise to say

one, thank you Sir
two, thank you Sir
three, thank you Sir.

Have fun!!

Dale

Oh, and by the way, your assumptions were correct.
 
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Reply: 2.1.1.1.1.1.2.1
From: Littlemaze :p


I have a question along the same lines that has been bugging me for a while.

I have "plain jane" IP loans which allows lump sum payments and redraw.

If I was to make a large lump sum payment into the loan and redraw it at a later date for a deposit on a subsequent property, how is it treated tax wise?

Does the ATO view the lump sum payment as a repayment of principle and stops there, or
will the ATO follow the cash trail right through to the cash being used for an income generating purpose and any additional interest is then tax deductible?

I recall something about the ATO viewing lump sum payments as repayments of principle and disallowing tax deductions on interest when funds are redrawn even for income generating purposes. Maybe this was in relation to LOCs??? Is this completely wrong, in which case I made it up along the way?? :0)

Thanks for your advice.
 
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Reply: 2.1.1.1.1.1.2.1.1
From: Dale Gatherum-Goss


Hi

By redrawing the lump sum repayments you have made, you will still be allowed to claim a tax deduction for the interest providing you use the redrawn amounts for income producing purposes such as a deposit, or otherwise, on a rental property.

Have fun

Dale
 
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Reply: 2.1.1.1.1.1.2.1.1.1
From: Littlemaze :p


Thanks Dale, you're a gem.
 
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Reply: 3
From: Geoff Donges



Thanks Robert, Dale, Rolf & others.

It is all very clear to me now, thanks. It's the way I was assuming it was, but my friend is still not totally convinced.
Robert - it was this friend who told me:
Someone said this to me on the subject:
"INTEREST on the LOAN you took to buy your investment is TAX DEDUCTIBLE..............
 
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