Split loan confusion

[sheiks]

I currently own two investment properties while paying off my own home. Currently my lenders have organised an investmment loan (interest only) for the two investments and a P& I loan for my own home. The breakdown is as follows:

Investment1- Loan Amount $167,000
Investment2-Loan amount $360,000

Total Investment Loan-$537,000

I presently owe $ 110,000 on my owner-occupier home whose market value is $220,000

My problem is that I will be moving into Investment 2 property and renting out my own home. Is it possible to re-financed the loan as below:

Investment1-Loan Amount $167,00 (same as before)
Investment2(previously owner occupied)-Loan amount -$220,000 (assuming lender's valuation is same as its present market value)

Total Investment Loan- $387,000 (interest only)

My owner occupier loan is now $360,000(P & I)

I hear that this maybe be unacceptable according to ATO rules and was wondering if someone could shed some light here.

sheiks

 

[Unit]

Sheiks

You may be able to refinance and owe $220 000 on the loan covering former PPOR. However you are only able to claim interest payments on $110 000 as a tax deduction against rental returns from this property.

regards

 

[DaleGG]

HI

I agree with Unit, I am afraid.

Dale

 

[sheiks]

Thanks folks

Appreciate your feedback.

Sheiks

 

[Tikki]

Hi Shieks,

Just a word of caution with split loans - a recent court case with the ATO has now made them illegal . However, If your Inv loans are P&I you'll be ok.

it would pay to make some phone calls to your accountant.

 

[mckennal]

Just a word of caution with split loans - a recent court case with the ATO has now made them illegal . However, If your Inv loans are P&I you'll be ok.

I don't believe this statement to be true... I am no accountant, but I did follow the court case. Split loans are not illegal (AFAIK) but if you do certain things with them - and claim certain amounts of interest as a deduction you might be dicing with the ATO.

Check with your accountant if you are unsure.

Regards
Luke

 

[Jamie]

Hi Tikki,

Luke has it right. Its not the actual split loan itself that the ATO ruled against in the Hart case - it was the capitalising of PPOR interest (non-deductible) and then claiming the interest as a tax deduction against investment debt.

Jamie.

 

[Tikki]

Aha, thanks for the correction.

I thought that was the same thing, but i personally wasnt following the case. This was just what I was told by my accountant.

ta!

 

[mckennal]

This was just what I was told by my accountant.

If your accountant told you split loans were illegal, I would be seriously thinking of changing accountants...

Luke

 

[Tikki]

Another correction.

My accountant told me that if your split loan was set up so your IP was an IO loan, THIS was now illegal. However if your split loan IP was a P&I loan, this was okay which confirms what Luke and Jamie have said.

It was my mistake to say that the whole split loan thing was illegal. Hope that cleared things up. I'll just shrink back in my hole now.

 

[NormH]

Another correction.

My accountant told me that if your split loan was set up so your IP was an IO loan, THIS was now illegal. However if your split loan IP was a P&I loan, this was okay which confirms what Luke and Jamie have said.

It was my mistake to say that the whole split loan thing was illegal. Hope that cleared things up. I'll just shrink back in my hole now.

Hmm hi all,
sorry to be a pendant, and I am not a lawyer but I would like to express my view of the HighCourt decision.
There is nothing illegal about split-loans and you can continue to do them if you wish until the cows come home. However what you can not do is claim the capitalised interest as a deduction if it may be interpreted by the ATO that there was no legitimate business reason for doing so. In other words the action could be viewed as tax evasion. Hart tried to claim the only reason for entering such an arrangement was so they could afford to take the action they did, buy new home for themselves and keep existing as an investment property - hence generating income. The ATO was arguing it was an arrangement driven to reduce tax rather than a true business reason.
However capitalisation of interest is a legitimate claim used by business' in their day to day running.

Norman

 

[NickM]

sorry Jamie but i disagree with your comments


Harts case was specific to the split loan facility
2 separate loans are OK as long as you are not capitalising interest to create a tax advantage. Normal course of running your business is OK.

The Wealth Optimiser product had marketing material that pushed the tax advantages of the loan.
I have made some comments in a PDF doc on my website which you are free to download which may help you get a better understanding of the case.

http://www.strategicwealth.com.au/e2Content.asp?Request=NewsLetter.NewsLetter

What Sheik should consider is the cost of transferring the old PPOR to another person or trust, then borrowing for the full market value. The excess can then be used to reduce the PPOR debt by $110K. CGT and stamp duty must be considered. if it has always been a PPOR then CGT should not apply

Good Luck
NickM



NickM