Tax deductability of loan after in security substitution

[Peter_Tersteeg]

Talking with a colleague, we came across a tax and loan structuring conundrum...

You have a PPOR with two loans.
* Loan A is a normal non deductible home loan.
* Loan B was an equity access and used as a deposit and purchase costs for purchasing an IP, as a result it's tax deductible.

You now sell your PPOR but you're buying another PPOR shortly afterwards. When you sell the first PPOR you'll have to close both loans. You'll then establish loans to purchase the new PPOR.

Can you replicate Loan B as tax deductible against the new purchase? Basically open loan B again, but against the new property?

Now consider if you have both the sale and the purchase happen on the same day. You can use the portability feature of the two loans and simply move them from one security property to the other.

In this scenario would Loan B still be tax deductible?


For the first question I suspect that the new version of loan B would no longer be tax deductible because the new version of loan B was not used to purchase a deductible asset.

The second scenario (substituting of security) is essentially the same thing with slightly better timing. The main difference is that the original deductible loan was never closed then reopened.

 

[D.T.]

I've seen similar before where on the new loans on the new home, they asked for a split to represent Loan B for an identical amount that Loan B was previously. The balance of everything else goes into the new Loan A.

Then you can argue Loan B = Loan B, so purpose of those funds are still deductible as they were/are the deposit on your IP.

 

[Peter_Tersteeg]

I agree Dave, it makes sense. It's the argument I'd make.

I suspect the ATO might look at it differently though. The new Loan B is a physically different account and it could be argued that it's purpose is to purchase the new PPOR, not the IP.

 

[D.T.]

Stop, private ruling time

 

[Terry_w]

This comes up a fair bit.

If you repay a loan it is gone. You cannot resurrect it later and claim the interest.

4 solutions
1. Simulatneuous settlement
not always practical

2. termporarily borrow from family, trusts etc

3. Ask the lender to keep the loan open by having proceeds equivalent to the loan amount paid into a term deposit which is used as security.

4. Increase the loans on the investment properties to refinance the investment loan which is secured by the PPOR.

 

[Peter_Tersteeg]

Thanks Terry, that's kind of what I thought the situation would be.

I've managed to employ options 1 & 3 before, but I was discussing it with a friend this afternoon and the question came up.

 

[Paul@PFI]

This comes up a fair bit.

If you repay a loan it is gone. You cannot resurrect it later and claim the interest.

4 solutions
1. Simulatneuous settlement
not always practical

2. termporarily borrow from family, trusts etc

3. Ask the lender to keep the loan open by having proceeds equivalent to the loan amount paid into a term deposit which is used as security.

4. Increase the loans on the investment properties to refinance the investment loan which is secured by the PPOR.

The "refinance" issue is a concern whenever equity is used on the PPOR and a decison is made to move. Back to back refinance as Terry describes is the only solution although some costly bridging facilities can also be used.

This same refinance issue is one of the major concerns I raise when clients try to do a Reg 13.22 Ungeared Unit Trust. Its VERY important to consider how a change of residence or a sale of the (security) property being used as loan security will be handled. Ideally if loan security can be switched and the new PPOR not used its all good.