Refinancing / tax deductibility questions

[HappyCamper]

I've refinanced IP #1 to pull out $20k - funds sitting in an offset account offsetting the interest on the only home loan on IP1.

I'm about to refinance IP #2 to pull out $80k and park the funds in an offset account to offset the interest on the home loan on IP #2. There's the suggestion to create two sub-loans - the original loan + a separate $80k loan.

My question is - how do I treat the $20k and $80k from a tax perspective while the funds are continuing to sit in the offset account? Does it matter that IP #1 has only one loan although $20k has been pulled out?

At the point I purchase IP #3, $20k from the loan of IP #1 will be tax deductible against IP3 and $80k of the loan of IP #2 will be tax deductible on IP #3. Is that all correct?

Do I need to keep tabs of which funds are tax deductible against which properties?

 

[Peter_Tersteeg]

By putting the money into an offset account you have potentially created a tax problem. The offset should be where you keep your savings, not where you park money from a redraw. Mixing borrowed money and saved money is generally quite bad and contaminates the use of the funds.

If the only money in the offset account is from the equity, then you're probably okay given it's offsetting an investment loan, but it's a grey area. If it's offsetting non deductable debt then you're using the money for a non deductable purpose and thus the $20k would not be tax deductable.

The best place to park the money from your equity draw is back in the redraw of the loan account. There's no need to split the loan in two as long as the money will be invested under the same ownership structure as the existing investment loan asset.

 

[Paul@PFI]

I'm of the view NEITHER $20k or $80K will be deductible as the funds were drawn for the purpose of parking in your personal savings accounts (ie offsets). Drawing from an offset isnt same as drawing down a loan. Instead, you should leave these amounts undrawn until IP3 needs to be financed. At that time drawn the funds and directly pay the solicitors for settlement. That way the nexus to acquiring IP3 is clear.

Allowing the borrowings to be parked in an offset doesnt work to connect the purpose of the increased loan on Ip1 or IP2 to the acquisition. Using the offsets to park the $$ seems like an interposing problem which taints the direct nexus. Some may argue otherwise but I take the view that if its irrelevant then do it the most direct way and avoid an arguement later.

If there was a bank requirement that forced the drawing now one way could be to draw the $$ now and pay the solicitors trust account now as a advance paymnet towards settlement. Better than then the redraw method. Interest would be deductible from day 1.

 

[Peter_Tersteeg]

If there was a bank requirement that forced the drawing now one way could be to draw the $$ now and pay the solicitors trust account now as a advance paymnet towards settlement. Better than then the redraw method. Interest would be deductible from day 1.

For what it's worth, the banks almost always park money from an equity release into a savings account (usually an offset account if it's available). It's not ideal, but as soon as it's done, we usually advise the borrower to move the money back to the redraw facility.

 

[HappyCamper]

The $20k is already in an offset account, but I am yet to do anything to pull out the $80k. The $20k has not been mixed with private funds. Does this change anything? Should I be putting this back into the loan to redraw at the point I purchase IP3?

 

[coastymike]

Depends was the $20k withdrawn from IP#1 and put into an offset account linked to IP#1 ? If so and not contaminated then interest might be deductible in future http://www.ato.gov.au/rba/content/?ffi=/misc/rba/content/57920.htm

If the $20k was taken out and put into an offset account NOT linked to IP#1 then agree with Paul the interest wont be deductible.

 

[pinkboy]

For what it's worth, the banks almost always park money from an equity release into a savings account (usually an offset account if it's available). It's not ideal, but as soon as it's done, we usually advise the borrower to move the money back to the redraw facility.

Yep, BOQ did this to me recently.


pinkboy

 

[HappyCamper]

Depends was the $20k withdrawn from IP#1 and put into an offset account linked to IP#1 ? If so and not contaminated then interest might be deductible in future http://www.ato.gov.au/rba/content/?ffi=/misc/rba/content/57920.htm

If the $20k was taken out and put into an offset account NOT linked to IP#1 then agree with Paul the interest wont be deductible.

The $20k was put into an offset account linked to IP #1.

 

[HappyCamper]

Still really confused by this. Seems to be a bit of a grey area and I'm getting contradicting views on this.

So to recap, $20k was redrawn from the mortgage with the INTENTION of buying the next IP, but has so far been sitting in the offset account linked directly to the IP. The money has not been mixed with any other money.

Help!

 

[Rob G.]

Depends upon whether a 100% offset account.

 

[Peter_Tersteeg]

Still really confused by this. Seems to be a bit of a grey area and I'm getting contradicting views on this.

So to recap, $20k was redrawn from the mortgage with the INTENTION of buying the next IP, but has so far been sitting in the offset account linked directly to the IP. The money has not been mixed with any other money.

Help!

As best I can tell, Pauls' and my opinion are essentially the same, but from different points of view.

If there's no other money in the offset account and it's offsetting the IP from which the money came you're probably okay, but I'd be moving the money back to the redraw facility of the loan where it came from.