Schemes structures, refinancing and capitalising interest - first post, sorry!

Hi all, new member here. I wish I had found this forum 6 months ago and done a bit of research then. A bit embarrassing, but here is my situation. I am one of the many who has been talked into a property investment scheme by one of the familiar (to you guys I am sure) property investment / retirement planning “consultants”. So we have a brand new mortgage, in fact 3 brand new mortgages and 2 new lines of credit, as we have purchased a block-and-build scheme in Queensland and refinanced all of our mortgages. Needless to say we have copped plenty in fees and mortgage insurance, however I am reasonably happy that our finances are better organised and tax effective, and as long as the property is tenanted I think it could be ok as an investment, and equity in our PPOR has been separated from our 2 investment properties (one pre-existing) as far as security is concerned.
Anyway, here is the situation with our accounts
A account – line of credit secured on PPOR with facility to borrow around $140k to fund renovation project on PPOR. Remaining debt on PPOR is around $30k. (Total LOC to $170k)
B account – line of credit to $100k to fund refinancing expenses, deposits and progress payments for new build IP.
C account - $50k share investment loan, this was a pre-existing loan with previous bank, just refinanced.
D account - $300k property investment loan, this was a pre-existing loan with previous bank, just refinanced.
E account – balance of new build loan, with allowance for costs and interest servicing until tenanted. $278k. This account is not yet in place.
As per usual, the strategy is to use a CC to fund all private expenses and direct all income into the A account to minimise non-ded debt.
My understanding is that A account is non-ded, B, C, D, E accounts, interest is ded.
OK, so here is the first part of my question. Refinancing expenses were charged to the A account, including search fee, bank fees, mortgage insurance for A,C,D accounts. I believe they should have been directed to the B account (capitalised), except for the mortgage insurance on the A account. As such I have made a transfer from the B account to the A account to correct this. Is this all OK? I believe too that old-bank break fees are deductible, but refinancing fees need to be amortised over 5 years (from research on here.)
Next, they are telling me to direct all of my interest from the loan accounts to the B account, however from my research on here I believe that that is capitalising interest and a no-no per the ATO. However, when I think about it, a LOC which charges itself interest is doing exactly the same thing. I am confused as to if this is how an LOC works and where I should be directing interest, as interest is close to due and I do not want to default.
Any other comments on the structure most welcomed.
Apologies for the long and complex post.
Regards
Ian
 
Hi all, new member here. I wish I had found this forum 6 months ago and done a bit of research then. A bit embarrassing, but here is my situation. I am one of the many who has been talked into a property investment scheme by one of the familiar (to you guys I am sure) property investment / retirement planning “consultants”. So we have a brand new mortgage, in fact 3 brand new mortgages and 2 new lines of credit, as we have purchased a block-and-build scheme in Queensland and refinanced all of our mortgages. Needless to say we have copped plenty in fees and mortgage insurance, however I am reasonably happy that our finances are better organised and tax effective, and as long as the property is tenanted I think it could be ok as an investment, and equity in our PPOR has been separated from our 2 investment properties (one pre-existing) as far as security is concerned.
Anyway, here is the situation with our accounts
A account – line of credit secured on PPOR with facility to borrow around $140k to fund renovation project on PPOR. Remaining debt on PPOR is around $30k. (Total LOC to $170k)
B account – line of credit to $100k to fund refinancing expenses, deposits and progress payments for new build IP.
C account - $50k share investment loan, this was a pre-existing loan with previous bank, just refinanced.
D account - $300k property investment loan, this was a pre-existing loan with previous bank, just refinanced.
E account – balance of new build loan, with allowance for costs and interest servicing until tenanted. $278k. This account is not yet in place.
As per usual, the strategy is to use a CC to fund all private expenses and direct all income into the A account to minimise non-ded debt.
My understanding is that A account is non-ded, B, C, D, E accounts, interest is ded.
OK, so here is the first part of my question. Refinancing expenses were charged to the A account, including search fee, bank fees, mortgage insurance for A,C,D accounts. I believe they should have been directed to the B account (capitalised), except for the mortgage insurance on the A account. As such I have made a transfer from the B account to the A account to correct this. Is this all OK? I believe too that old-bank break fees are deductible, but refinancing fees need to be amortised over 5 years (from research on here.)
Next, they are telling me to direct all of my interest from the loan accounts to the B account, however from my research on here I believe that that is capitalising interest and a no-no per the ATO. However, when I think about it, a LOC which charges itself interest is doing exactly the same thing. I am confused as to if this is how an LOC works and where I should be directing interest, as interest is close to due and I do not want to default.
Any other comments on the structure most welcomed.
Apologies for the long and complex post.
Regards
Ian

HI ian

Welcome

I think my first comment is that you need to take a BIG deep breath :)

If the reality is as busy as your post, you will go blue real quick

Who is the THEY you refer to when talking about getting directions to do setup the structure and move money around ?

ta
rolf
 
The structure doesn't appear to be that bad.

Try and get them to put things in writing about tax deductibility etc so that you can sue them later when things go wrong.:D

Where does all your wages and rents go?
Is there any chance that the main residence could become rented? I am a bit concerned about the LOC there on that, but it won't be an issue if never rented.

You cannot borrow to pay expenses that have already been paid so transferring money from A to B complicates things. But as they were charged to loan A you could argue that you were trying refinancing a sub-loan from A to B to separate deductible debt.

So the broker/sales person wants you to pay interest on the other loans by borrowing it from loan B - why would you do this other than for a tax benefit?
 
Thanks for the replies, guys.
Rolf, I am happy with the structure, it just cost a lot. That is not their fault and is a long story – essentially we agreed to the new loans, the original arrangement they proposed struck a hurdle with my previous banks’ insurance underwriter so we consented to all new loans. Not their fault.
Terry ‘they’ are a nation wide “group of consultants”. They are brokers, property managers, insurance sales and I am sure other things. I don’t have a problem with them making a buck, however they are not the ones signing my tax return. As things are in an early stage I am anxious to understand and set it up right. Terry, wages and rents go to the A account (private LOC) to pay off non ded debt ASAP. Private expenses are paid by CC which is cleared monthly from the A account.
OK, my questions are-
1. Am I correct about the deductibility of the break and refinancing fees?
2. When an LOC is charged interest, does the interest go to the LOC as a debit, thereby increasing the loan? If so, is this then not capitalising interest? As such, is an LOC allowed as deductible debt? Or can and should the interest be re-directed the A account?
3. ‘Their’ advice is to direct ded loans debt to the B account. My understanding is that this is interest capitalising, and needs to be directed to the same place the rents are going. Correct?

cheers
 
My answers are above.

With a LOC interest is charged to the account. If you don't pay it then that is capitalising interest. Same as if you borrow to pay it.

Therefore make sure you get proper advice especially in relation to the capitalising of interest as what if your reason for doing this - Dominant purpose of a tax deduction??
 
Yes, that is true - must pay the interest each month, but this can be from another account or a LOC.

Gero, which lender(s)?
 
Terry - Lender is ANZ bank, and yes the reason would be tax deduction. What else could it be? Separation of Ded and Non Ded debt? That again is for the tax deduction.
Aaron - I'm paying a package fee which covers all of the accounts. I trust this is deductible?
BTW guys, I am borrowing the cost of the fees, stamp duties, mortgage insurance rolled into the purchase price - is this ok?
OK, so this is what I am going to do. I am going to direct all interest charges, including the B account (LOC) interest to my A account (Private LOC.) This should keep me above board with the tax dept? (This is going directly against 'their' advice.)
 
BTW guys, I am borrowing the cost of the fees, stamp duties, mortgage insurance rolled into the purchase price - is this ok?

Above you said you borrowed to pay these fees but it came out ("were charged to") of loan A???

If it hasn't happened then I suggest the fees relating to the investments come out of the investment LOC B.
 
OK, so this is what I am going to do. I am going to direct all interest charges, including the B account (LOC) interest to my A account (Private LOC.) This should keep me above board with the tax dept? (This is going directly against 'their' advice.)

This is still borrowing to pay interest and you will be mixing investment debt with private debt. Not good.

Where is your offset account in all this?

I think you need to rethink things if possible. Ideally I would want to see a IO loan with an offset in place of A with maybe a separate split as a LOC and then work out a way, with a private ruling, of how to pay some or part or all of the interest by borrowing from the LOC split. Or just put all income into the offset and use that the pay interest on all loans.
 
Hope you won't use this argument with the ATO!

Terry, I am hoping I wont need to, as I wont be claiming any interest from the A account as a tax deduction. I understand it is capitalising and mixing debt but should be a non-issue as the account is for private use.(?)

Above you said you borrowed to pay these fees but it came out ("were charged to") of loan A???

If it hasn't happened then I suggest the fees relating to the investments come out of the investment LOC B.

It has happened, Terry, but “was charged to” loan A. I calculated the amount and paid loan A from loan B for the debt.

This is still borrowing to pay interest and you will be mixing investment debt with private debt. Not good.

Where is your offset account in all this?

I think you need to rethink things if possible. Ideally I would want to see a IO loan with an offset in place of A with maybe a separate split as a LOC and then work out a way, with a private ruling, of how to pay some or part or all of the interest by borrowing from the LOC split. Or just put all income into the offset and use that the pay interest on all loans.

I don’t have an offset account, or for that matter a loan account for private purposes other than LOC A. I assumed that as long as the PPOR stays a private, non ded property, essentially what I have is as described except in one account rather than two. (For practical rather than accounting purposes.)

cheers
 
ATO put out a ruling earlier this year saying that the can apply part IVA to schemes involving the capitalising of interest. Seems like your dominant purpose is to increase your tax deductions and pay your home loan off sooner so the ATO could deny you a deduction in part or full.

See my comments above about the fees.
 
Interesting. My argument would be that a private LOC is a financing decision on my behalf and the vehicle I have chosen to pay my interest as and when it falls due. The dominant purpose for having two LOC's is to separate private and buisness debt. Deductions are in no way increased as interest is not compounded inside deductible accounts, and any back calculation of deductible interest with a different arrangement will give exactly the same deductions.
 
Hi Gero

I think I have a somewhat similar setup to yours. I have several sub accounts for my loans. I set up an extra one that I draw from to pay the interest on the others. This account then increases each month as I'm capitalising the interest. I actually pay the interest on this separate one out of my money - so I'm not capitalising the interest on the capitalised interest...

I pay from my savings account, whereas you will be paying from your non deductible LOC - same deal as long as you then do not try to claim any interest on your non deductible LOC.
 
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