Small Redraw Mistake - Can I be dodgy?

[Burnar]

Hi folks.

Firstly - I believe I understand the tax implications of redrawing from a loan vs redrawing from an offset. So I don't think this needs to be re-explained here.

I own 1 property, a PPOR. I recently moved into a share house situation and placed tenants in my PPOR. This will be me first tax return since then.

While living in the property, Ignorantly, and with the mindset of "I'm saving interest" I stored all my excess cash in my mortgage account, and redrew on occasion. Not a huge amount. about $500 to $3000 at a time, maximum of maybe $10k over a couple of years. (Loan value mid $300k)

I know that the interest on this is "non-tax deductible". I'm wondering how best to work it out. DO i really need to go back through my bank statements for the last couple of years, pick out all withdrawals, then calculate how much interest isn't tax deductible per withdrawal based on the date it occurred? This sounds like a pretty huge task. Would it be simple for an accountant to plug into a spreadsheet or something? Should I just prepare dates and values of transactions for him?

On the other hand - What if I ignore it. Is my accountant going to dig through my bank statements and scold me for it? Is the ATO going to notice? Will it come up to them automatically? or only if they decide to Audit? Is the penalty any more than just repaying what tax is owed? (Which would be something like $200 right?)

I think I know what kind of response I'm going to get here. Especially from Terry W.

 

[The Y-man]

Unfortunately the amount is not small... if it was like $300 or something maybe won't matter but $10k is a bit.

Your accountant don't really care - you sign the declaration. The ATO in the ohter hand can hound you for $20 even if it costs the tax payers $20,000 for them to find it.

Not that difficult -go back through the statements (electronic), advise accountant $amount and when, and they can figure it (you can do it too on excel if you want)

The Y-man

 

[vaughan]

The only deductions you can make are for the period the PPOR brought in income, which from your post was quite recently. All expenses and interest paid BEFORE then is not a tax deduction.

Work out the interest paid since the tenants went in. That's all the interest you can claim.

You accountant won't scold you. They are not liable for incorrect information that YOU give them to put on your tax return.

 

[dan c]

The only deductions you can make are for the period the PPOR brought in income, which from your post was quite recently. All expenses and interest paid BEFORE then is not a tax deduction.

Work out the interest paid since the tenants went in. That's all the interest you can claim.

That's not quite correct. If the loan value is $350k, and the redraws (before becoming IP) are $10k, then the deductible portion of the loan is $340k. The deductible interest is the interest paid after it became an IP x 340k/350k.

 

[The Y-man]

That's not quite correct. If the loan value is $350k, and the redraws (before becoming IP) are $10k, then the deductible portion of the loan is $340k. The deductible interest is the interest paid after it became an IP x 340k/350k.

Agree - needs to be apportioned. So does any repayments. You can't just repay the "personal" bit.

The Y-man

 

[Burnar]

It turns out netbank is quite good at searching for old transactions and exports to CSV nicely. Total figure is $10.6k, my guess was pretty close then, huh.

Thanks Y-Man, I get what you're saying. Can the ATO get access to these transactions, though? they add up to a decent amount but most are smallish. (again, I know it's dodgy)

Vaughan, I'm not talking about expenses and interest before becoming a rental. I'm talking about interest on what is considered non-investment borrowings.

 

[Terry_w]

That's not quite correct. If the loan value is $350k, and the redraws (before becoming IP) are $10k, then the deductible portion of the loan is $340k. The deductible interest is the interest paid after it became an IP x 340k/350k.

It will be much more complex than this.

eg. $350,000 starting balance before any deposits and withdrawals

1. Place $500 in loan. Balance = 349,500

The amount of the loan that can be associated with the purchase of the property is now $349,500

2. $100 is withdrawn. balance = $349,600

The amount of hte loan that can be associated with the property is now $349,500. the percentage is 349,500/349,600 x 100 = 99.97%

this means that any subsequent deposits must come off the loan balance in that proportion. ie 0.03% of any deposit must come off the private portion.

Imagine trying to work that out. Now add in interest and it will be extremely complex.

But, I think the ATO allows an reasonably worked out apportionment so maybe it will not be this complex.

 

[Burnar]

Dan C and Y-man replied to Vaughan as I was typing.

And thanks Terry, I was trying to figure out how to say what you just said.

 

[Burnar]

And following on from Terry, Imagine doing that on repeat,
-add $5k extra payment, apportion repayment to deductible and non-deductible,
-redraw $500, calculate non deductible percentages again,
-add regular monthly Principal payments for a couple of months, apportion repayment to deductible and non-deductible,
-redraw $1500, calculate non deductible percentages again,
-add $2k extra payment, apportion repayment to deductible and non-deductible,
-add regular monthly Principal payments for a couple of months, apportion repayment to deductible and non-deductible,
-etc, etc. for a couple of years.

Is it easiest to just say, for example "on x date, when I put tenants in, I had a total of $10.6k non-deductible balance and total of $300k, therefore going forward, 3.5% of interest payments will not be deducted and I promise not to redraw any more." (obviously, this doesn't work in my favour, but I imagine it's better to be wrong in the ATO's favour than in your own.)

 

[Rolf Latham]

Hi folks.

Firstly - I believe I understand the tax implications of redrawing from a loan vs redrawing from an offset. So I don't think this needs to be re-explained here.

I own 1 property, a PPOR. I recently moved into a share house situation and placed tenants in my PPOR. This will be me first tax return since then.

While living in the property, Ignorantly, and with the mindset of "I'm saving interest" I stored all my excess cash in my mortgage account, and redrew on occasion. Not a huge amount. about $500 to $3000 at a time, maximum of maybe $10k over a couple of years. (Loan value mid $300k)

I know that the interest on this is "non-tax deductible". I'm wondering how best to work it out. DO i really need to go back through my bank statements for the last couple of years, pick out all withdrawals, then calculate how much interest isn't tax deductible per withdrawal based on the date it occurred? This sounds like a pretty huge task. Would it be simple for an accountant to plug into a spreadsheet or something? Should I just prepare dates and values of transactions for him?

On the other hand - What if I ignore it. Is my accountant going to dig through my bank statements and scold me for it? Is the ATO going to notice? Will it come up to them automatically? or only if they decide to Audit? Is the penalty any more than just repaying what tax is owed? (Which would be something like $200 right?)

I think I know what kind of response I'm going to get here. Especially from Terry W.

step one if not done already is to convert the loan to an IO loan.

If u can clearly ID the non ded and the ded portions, then set up separate splits for same, so that your book keeping and compliance are simpler

ta

rolf

 

[Burnar]

It is IO now, you'll be happy to know.

 

[vaughan]

And following on from Terry, Imagine doing that on repeat,
-add $5k extra payment, apportion repayment to deductible and non-deductible,
-redraw $500, calculate non deductible percentages again,
-add regular monthly Principal payments for a couple of months, apportion repayment to deductible and non-deductible,
-redraw $1500, calculate non deductible percentages again,
-add $2k extra payment, apportion repayment to deductible and non-deductible,
-add regular monthly Principal payments for a couple of months, apportion repayment to deductible and non-deductible,
-etc, etc. for a couple of years.

Is it easiest to just say, for example "on x date, when I put tenants in, I had a total of $10.6k non-deductible balance and total of $300k, therefore going forward, 3.5% of interest payments will not be deducted and I promise not to redraw any more." (obviously, this doesn't work in my favour, but I imagine it's better to be wrong in the ATO's favour than in your own.)

Is it that complicated?

Remember that everything that happened BEFORE the property was rented out DOES NOT MATTER.

The issue is that the account is P&I and had extra payments put into it. This reduces the interest paid. If the money is redrawn out then that increases the interest again. It does not matter what the redraw was used for, all that matters is that the interest went to the house.

Work out all the interest paid since the property was rented out. Then apportion the percentage of private use in the property (should be 0%) and apportion the rest (100%) of the interest as an expense.

 

[Terry_w]

Is it that complicated?

Remember that everything that happened BEFORE the property was rented out DOES NOT MATTER.

What happened before the property was rented does matter.

This is because only the interest on the loan taken out to purchase an income producing asset will be deductible.

If money was placed into the loan and then take out the withdrawal is considered a new loan. The interest on this new loan will only be deductible if the money is used in relation to the property such as paying for expense - other for other income producing adventures.

The loan will then also be a mixed loan with part relating to the property and part other.

 

[Burnar]

What happened before the property was rented does matter.

This is because only the interest on the loan taken out to purchase an income producing asset will be deductible.

If money was placed into the loan and then take out the withdrawal is considered a new loan. The interest on this new loan will only be deductible if the money is used in relation to the property such as paying for expense - other for other income producing adventures.

The loan will then also be a mixed loan with part relating to the property and part other.

This was my understanding, and why I asked the question. Thanks Terry.

Going back though, how should I approach it when I work out my return? Do I
a) Round it down to zero and ingore it. hoping the ATO doesn't audit me.
b) Round it up to the sum of all withdrawals.
c) Spend half a day calculating all withdrawals, principal payments and extra payments to find the percentage deductable.

I can see how splitting the loan would be useful going forward, and will look into that. If i were to do that, I assume I could then pay down the non-deductible loan and be done with it, right? How would I go about quarantining the funds during the split process, though? Sounds tricky.

 

[Burnar]

... The interest on this new loan will only be deductible if the money is used in relation to the property such as paying for expense - other for other income producing adventures...

That just reminded me that at least $4.5k was property related expenses. Still leaves about $6k gumming up the works.

 

[vaughan]

My take is that the OP took out a P&I mortgage to buy the property. So all of the interest goes to the property, right?

The OP pays off more principal than necessary, so they saved on the interest. If they then re-draw the extra principal out then we're back to where we were: all the interest goes for the costs of the house. It does not matter what they did with the re-drawn money. It's not a new loan.

Is my thinking wrong?

 

[Jake D]

Is my thinking wrong?

From what I have previously been told, and read elsewhere on this forum, and what Terry has written, yes.

It is why you can find hundreds of posts and comments telling people that redraw and offset do not work the same way, despite what the banks may tell you or how they sell their redraw products.

 

[Terry_w]

My take is that the OP took out a P&I mortgage to buy the property. So all of the interest goes to the property, right?

The OP pays off more principal than necessary, so they saved on the interest. If they then re-draw the extra principal out then we're back to where we were: all the interest goes for the costs of the house. It does not matter what they did with the re-drawn money. It's not a new loan.

Is my thinking wrong?

Yes, that is not correct.

Because redrawing from a loan is actually reborrowing money. That is why it is best to avoid paying into a loan, even on your PPOR, in case you move out.

A few days ago I was with a group of friends in a coffee shop and one commented on another who had paid off his home and then went and bought a new one. He said the guy should have borrowed against the old PPOR, which is now rented, for the new purchase so he could claim the interest. This line of thinking is very common. And when I pointed out it was wrong he wouldn't believe me.

 

[dan c]

The OP pays off more principal than necessary, so they saved on the interest. If they then re-draw the extra principal out then we're back to where we were: all the interest goes for the costs of the house. It does not matter what they did with the re-drawn money. It's not a new loan.

Is my thinking wrong?

I'm sorry bro, it is. Any re-draw is considered a new loan, regardless of whether it came from extra repayments or a revaluation or wherever.

 

[oakmont]

Hi everyone, long time lurker, first time poster.

I understand all the rulings etc, but am I right to believe that if you can reasonably prove that your intention was not to bring down the loan balance, but that the 'repayment' was in fact just parking cash, it could be ok?

As case in point, I have a mate with ppor who was fortunate to be provided with a large sum loaned to him by his folks, purely for the purpose of using it to offset his mortgage so he could pay it down quicker. his offset account was also his everyday account, and the bank adviced they were unable to open 2 offset accounts for him. as he didn't feel comfortable having a lump sum in his everyday account which was accessible by cards, he parked it in his mortgage instead.

In this case, if the rules are strictedly applied with no provision for discretion of the circumstances above, it would not be viable for old mate to make his current ppor a ip (and the loan from parents withdrawn) down the track, as his loan had been substantiately 'repaid'