Refinance PPOR loan to sructure for future conversion into IP??

[vicenteramos]

Hi All!

I have been advised by my financial planner that I should refinance my current PPOR P&I loan (150K debt with 80K redraw available) to a Line of Credit type loan(Interest only).

He purports that we cannot legally draw out all available redraw when it comes time to convert our PPOR into an IP (say in 2 years time) in order that we get maximum tax benefits. ie. If we have 150K debt and 80K redraw, just before we convert to IP, we are no legally allowed to transfer out the 80K and make the debt 230K. Then, claim tax deduction on interest for the full 230K. Hence, he proposes that we refinance & restructure our current 150K debt now (without being able to legally draw on the 80K redraw).

Even if this is true, I don't see how a LOC loan structure will solve the issue, isn't it exactly the same as a redraw? Is there any reason why I can't just use my existing loan as an investment loan later on down the track, redrawing all available redraw and maximizing tax deductibility? Though I realise that P&I is not necessarily ideal for an investment.

I need a second opinion to make sure that i'm not just being shoved another sale! Please help!

 

[Rolf Latham]

Hi

And welcome !

I think what they are on about is that the redraw portion of 80 k will bhard to apportion to some investment debt

Hence refi now to a 150 k split and an 80k ( currently unused split) ?

Ultimately deductability will be determined by the use of the 80 k !



ta
rolf

 

[Qlds007]

The advice you have been given is why in MOST cases Financial Planners should stick to what they do and a Finance Broker do the loan structuring and refinancing.

The ATO will apply the original purpose test to determine the suitability for interest deductability.

Couple of things you can do but still wont solve all of your problems.

 

[dantheman]

I'd be nervous about redraw, especially if you've had personal use. Keeping seperate purposes to seperate splits could be something to seriously consider.

This is one example of redraw gone wrong: http://www.nsw.gadens.com.au/client...s 2004/National/update_tax_170305.htm#lawyers

 

[Finance guru]

Hey vicenteramos
I think it wold be better to get a second opinion from an accountant to be entirely certain.

My understanding of the issue is that when you move out of your PPR and make it an investment property, then the debt used to purchase that property changes from non deductible to deductible debt. So how that debt was structured would make little difference as all of it becomes tax deductible.
But keep in mind, that I'm not an accountant and can't give you tax advice.

Perhaps the FP was thinking of cash out restricitions that your lender might have?

 

[WinstonWolfe]

My understanding is that if you have an IO loan for an IP, with an offset facility as opposed to a redraw, you can move cash in and out of the offset account and not effect the deductibility of the interest paid. And you can use those offset funds for any purpose. This isn't the case for a redraw facility.

However, if any of the mortgage brokers want to elaborate, I'd appreciate an up to date explanation of the difference between offset and redraw, P&I and IO, in relation to tax deductibility.

 

[Qlds007]

Winston

Your understanding is correct and what we tell every client.

Not all of the do this but Rome wasnt built in a day.

 

[dantheman]

Jenelle that is partly right. True if all the debt was used to purchase that property, but what if some of the debt has been used for other purposes in the past.. messy. Many people pay off credit cards each time they refinance, and also add car loans, or use redraw to buy Plasma tv's & holidays before intending to invest. If they are thinking ahead, they would consider using seperate splits for these purposes. Unfortunately not every borrower and broker thinks past the current transaction.

Going back to what Rolf said - it is the purpose of the funds that is important. However when using redraw, the debt drawn out is mixed in with other debt. If there happened to be personal-use redraw in the past then the loan has become dual-purpose. You'll need a very good accountant if you get audited.

Why not just keep seperate loans? That way you have the flexibility of changing the purpose of either property without having the debt lumped together. My own mortgages have a maximum of 1 purpose/property per loan. Even if I'm going to buy shares, I'll get another split on my loan just in case I move into an IP because you never know..

Winston - I think we both prefer offsets, however brokers aren't able to give direct tax advice on why it is, so it would be an accountant that we need to provide the full explanation. All I can say is keep your loans seperate - so your accountant can do their job easily.

Cheers

 

[Finance guru]

Hey Dan,
What I actually said was...

My understanding of the issue is that when you move out of your PPR and make it an investment property, then the debt used to purchase that property changes from non deductible to deductible debt.

So, yes I am referring only to the debt used to purchase the property, not any funds used for consolidation of other debts, or for personal use like holidays, cars etc...

Cheers

 

[dantheman]

Hi Janelle you're right that's true, I was referring to your comment about structure - "how that debt was structured would make little difference". I'm just wary of customers looking at this too simply that's all.

Sure the structure of the first loan is fine, although I find redraws/top ups and refinances are a fact of real life...
Sometimes people who do mix up their personal usage aren't aware. Many people assume that if they redraw they are "just taking out money that they put there temporarily", which is not how the ATO sees it unfortunately. Life isn't always fair and sometimes it's damn technical!

Cheers