Structuring finances to maintain tax deductability

[DizzyStuff]

Hi all,

I'm just starting out with property investment and now have IP1 under contract which settles in three weeks. Finance for the IP is a 5% interest only 3 year fixed loan for 80% of the value of the house(255k) at 204k for this.

To fund the shortfall for the IP (approx. 60k) on this purchase I have mortgaged my PPOR, which previously I owned outright. This loan is for 220k(80% of house value) and is a variable loan with an offset account attached. This will settle in the next few days with the funds being placed in the linked offset account ready to be used when the IP settles a few weeks later.

What I am concerned about is maintaining the tax deductibility of interest on the PPOR loan. As this loan settles earlier than the IP itself will this have an impact as the purpose of the loan for investment hasn't been fulfilled. It will be sitting around doing nothing for 2 weeks.

Also the loan only has a single offset account, so I planned to have all my income/expenses both personal and investment related running through this offset account. Will mixing these contaminate this loan and knock out my tax deductibility. Do I need to separate these out.

I did look through the forum and couldn't find this exact situation, but my apologies if it has already been covered.

 

[Rolf Latham]

Hi all,

I'm just starting out with property investment and now have IP1 under contract which settles in three weeks. Finance for the IP is a 5% interest only 3 year fixed loan for 80% of the value of the house(255k) at 204k for this.

To fund the shortfall for the IP (approx. 60k) on this purchase I have mortgaged my PPOR, which previously I owned outright. This loan is for 220k(80% of house value) and is a variable loan with an offset account attached. This will settle in the next few days with the funds being placed in the linked offset account ready to be used when the IP settles a few weeks later.

What I am concerned about is maintaining the tax deductibility of interest on the PPOR loan. As this loan settles earlier than the IP itself will this have an impact as the purpose of the loan for investment hasn't been fulfilled. It will be sitting around doing nothing for 2 weeks.

Also the loan only has a single offset account, so I planned to have all my income/expenses both personal and investment related running through this offset account. Will mixing these contaminate this loan and knock out my tax deductibility. Do I need to separate these out.

I did look through the forum and couldn't find this exact situation, but my apologies if it has already been covered.

Hi DZ

a common challenge

There is some concern by some tax pracs that parking money in any offset generally should be avoided due to

1, Domjan V Ato ( and this applies to your scenario !)
2. Once money comes from a loan and is parked in a separate acct of any sort, this money loses its borrowed nature, and becomes savings, and such the link between the


Im not a tax practitioner and always ask client to seek their own advice.

Sometimes, for logistics or product reasons what you propose is the ONLY way it can be done.

I personally use the offset methodology, and isolate ONLY borrowe funds to the account - but you need to seek specific tax advice.

If you pass anything though that offset that isnt borrowed money, you are asking for trouble.

If you only use the offset as a suspense account, that may be different.

Devil's Advocate, taking this logic one step further............... when making a deposit for a property........

DONT use a bank cheque, since the direct link between your loan and the vendor is broken. your money is parked in a banks suspense account - just like your offset account is you personal suspense account

DONT deposit funds into a solicitors trust account because there it is mixed with other funds AND there are at least 2 stakeholders for the deposit.


yes thats silly I know, the above are "accepted" means of transfer of funds.............but are they ? If a discrete offset account isnt, then these methods may also be suspect.

A six pack of PBRs pls.

ta
rolf

 

[DizzyStuff]

Thanks Rolf,

I have posed this question to my accountant also but haven't heard back yet.

There seems to be a lot of people with valuable experience frequenting these forums so thought I would pose it here too.

 

[Rolf Latham]

which lender are you using ?

most lenders will allow an IO loan with redraw, so then you can isolate the borrowings AND have an offset with personal and rental cash flushing through it without too much concern - maybe

t
arolf

 

[DizzyStuff]

Hi Rolf

I'm using ME bank ultimate offset account. I don't think they have any redraw facility.

Hopefully my accountant will get back to me today and I will sort something out. I will mention to her Domjan V Ato case which I just had a chance to read about.

Much appreciated.

 

[Aaron_C]

Put the money from the offset account into the loan itself. Create a new loan split for the 20% deposit+costs and redraw it when you need it.

 

[Rolf Latham]

Hi Rolf

I'm using ME bank ultimate offset account. I don't think they have any redraw facility.

Hopefully my accountant will get back to me today and I will sort something out. I will mention to her Domjan V Ato case which I just had a chance to read about.

Much appreciated.

hmmmm.

Product isnt ideally suited to your stated need then

ta
rolf

 

[s0805]

such a common challenge....where to park the money once the loan is drawn until you need it for investment purposes. One thing i would not do is mix this money with any of your personal expenses or income for sure to avoid the extra complexity.....if there is no redraw availble with your lender than open the additional offset to keep them seperate for time being may be....

Even using redraw rather than offset...could have the same problem if bank asks you draw the money from redraw and park the money somewhere before e.g writing deposit cheque...i know my bank doesn't allow me to use redraw money without parking it somewhere....

I will not be suprised if accountants have different view on this as well...keep us posted on what your accountant says anyway....

 

[DizzyStuff]

Hi all,

Thanks for the responses.

Turns out there is a redraw it just isn't listed in the features online. So I will have the options to segregate money by paying down the loan and just leaving what I need to settle in the offset account.

Still waiting to hear back from the accountant. I will let you all know the advice I get there.

Cheers

Diz

 

[Terry_w]

Hi all,

I'm just starting out with property investment and now have IP1 under contract which settles in three weeks. Finance for the IP is a 5% interest only 3 year fixed loan for 80% of the value of the house(255k) at 204k for this.

To fund the shortfall for the IP (approx. 60k) on this purchase I have mortgaged my PPOR, which previously I owned outright. This loan is for 220k(80% of house value) and is a variable loan with an offset account attached. This will settle in the next few days with the funds being placed in the linked offset account ready to be used when the IP settles a few weeks later.

What I am concerned about is maintaining the tax deductibility of interest on the PPOR loan. As this loan settles earlier than the IP itself will this have an impact as the purpose of the loan for investment hasn't been fulfilled. It will be sitting around doing nothing for 2 weeks.

Also the loan only has a single offset account, so I planned to have all my income/expenses both personal and investment related running through this offset account. Will mixing these contaminate this loan and knock out my tax deductibility. Do I need to separate these out.

I did look through the forum and couldn't find this exact situation, but my apologies if it has already been covered.

my opinion is that the interest will not be deductible.

you can help your chances of claiming some interest by making sure no cash goes into that offset account at all. ie borrowed money only.

why not just use a Loc?

 

[Rolf Latham]

why not just use a Loc?

LOCs have some of their own Chinks, some of which can be ugly

Repayment on demand clauses, annual reviews , and some other little tricky kits in the bag.

ta
rolf

 

[Terry_w]

LOCs have some of their own Chinks, some of which can be ugly

Repayment on demand clauses, annual reviews , and some other little tricky kits in the bag.

ta
rolf

true. what i advocate is to use the Loc initially to avoid problems with deductibility of interest and then once it is drawn down refinance that Loc with an io ter loan.

 

[s0805]

Hi Terry,

what you are suggesting is that if 90K is LOC and then when all of the 90K has been drawn from LOC, one should refinance it to standard variable IO loan...is that correct?that sounds to easy.....

Rolf, what do you suggest the success rate of doing above with the lenders.....surely lenders would have some sort of rules which can avoid above....at the end of the day they are selling LOC which has higher interest than normal variable loan & if they allow all borrowers to do this then it's not good deal for them.....But if that is frequently possible with any lenders, i think it's a brilliant idea....in that case do you communicate this to lender before taking LOC and tell your intentions etc....

Terry, what do you suggest for the future release of equity, i mean if above property against where LOC had been borrowed (NOW standard IO loan) has more equity generated, do you borrow that as another LOC loan and replicate the process..

 

[Rolf Latham]

Rolf, what do you suggest the success rate of doing above with the lenders.....surely lenders would have some sort of rules which can avoid above....at the end of the day they are selling LOC which has higher interest than normal variable loan & if they allow all borrowers to do this then it's not good deal for them.....But if that is frequently possible with any lenders, i think it's a brilliant idea....in that case do you communicate this to lender before taking LOC and tell your intentions etc.....

I think its simpler and healthier long term for ONE person to get a PBR on the "using discrete and isolated offset as suspense account issue) and if that comes out negative ( which i suspect it wont).

Doing the above from a lenders POV isnt a problem per se. Depending on the borrowers profile and goals it may not be a good thing because each internal refi may be another credit enquiry.........for a solid client at 80 % lvr or less, more than likely not a problem, for others it may create a major stumbling block, and the credit and taxation advisers would need to provide specific and personal advice on these separate issues.

ta
rolf


ta
rolf

 

[s0805]

Rolf,

Can you elaborate more on this pls....don't get it

I think its simpler and healthier long term for ONE person to get a PBR on the "using discrete and isolated offset as suspense account issue) and if that comes out negative ( which i suspect it wont).

I hear everyone talking about the credit hit and avoid that if possible......give you example.....recently trying to change my ANZ P&I to IO and ANZ required full application (due to their new process)...ie credit hit ........why credit hit against your file is big issue, shouldn't that be issue if your application gets rejected, but if its approved than shouldn't it look as favorably...lost

Depending on the borrowers profile and goals it may not be a good thing because each internal refi may be another credit enquiry.

 

[Aaron_C]

Credit hits are an issue because it all counts towards credit scoring. If you have huge net assets and income with low LVRs then it is less of an issue but if you are going for LMI etc it is a lot more critical for getting finance.

 

[DizzyStuff]

Update

Hi all,

I've finally settled on this house, and got the advice from the accountant.

Basically the offset account against the PPOR (220k) with the 158k sitting in it will be left alone and only drawn upon for the deposit and other buying costs for the next property.

All my rental related expenses, loan repayments and other income / expenditure will be going through my general transaction account I already have.

Cheers

Diz

 

[Shahin_Afarin]

So the accountant said when you purchase the your next IP - use the the funds sitting in your offset against the PPOR instead of borrowing the funds? Is that correct?

 

[DizzyStuff]

The money in the offset account will just be for whatever deposit I need, say 60k on a 20% deposit on 300 k house.

I'd still need another loan to cover the balance of the purchase.

The bottom line seemed to be I can only use it for purchasing property and associated buying costs and nothing else.

Which is fine. I'll probably be able to buy 2 more houses this way before I tap it out.

 

[Aaron_C]

I think you should ask your accountant to clarify. A better use of the offset money is to use it to pay off a bit of the PPOR loan, then redraw it out straight away to pay for the 20% deposit on a new IP.