The relationship between redraw and interest

From: John P


I have a loan for an IP with a redraw of 100K.

I decide that for the next year I will use the redraw time and time and time again to take out varying amounts each time to spend on non-income producing items. Occasionally I make repayments as well, often being odd amounts. Let's say for the sake of this scenario I make 500 redraws and 20 extra payments in one fin.year.

The point I am trying to make here is that how are people in such a situation going to be able to separate claimable interest from unclaimable interest when doing the tax? I'm not sure that this has ever been addressed on the forum before? but it must be a growing concern with loan products becoming more and more flexible and often offering various types of lines of credit.

Surely this must represent a big dilemma for the ATO or am I just missing something here?

Dale, looks like we've been giving you quite a workout lately.


John_P
 
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Reply: 1
From: Dale Gatherum-Goss


Hi John!

The answer is to take your long suffering accountant either chocolate or alcohol when you present such a problem. The larger the number of transactions the more gifts you should bear.

Seriously, it is a problem and the only way around it is to use a spreadsheet to calculate the interest. The tax office did provide a ruling at one stage that we can all follow.

Have fun

Dale
 
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Reply: 1.2
From: Rolf Latham


Hi Dale

The best way around it long term is to have an offset facility so you dont build up excess redraw capacity in the first place thereby protecting your tax entitlements without question.

Ta

Rolf
 
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Reply: 1.2.1
From: Dale Gatherum-Goss


Sssssh Rolf!

I'm onto a good thing here . . . I just got someone to agree to bring chocolates and wine with their tax stuff.

Seriously, yes, the offset account will make a difference and make life easier.

Have fun

Dale
 
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Reply: 1.2.2
From: John P


Hi Rolf, forgive me but I'm am not sure I understand your answer. I cannot see how JUST HAVING an offset account suddenly gives me the ability to clearly distinguish between the interest portion of my loan facility that can be claimed back and the part that can't. Could you possibly give an example?

As far as I can see the scenario that I mentioned in the original post , at tax time, will be like separating oil from water.


Regards


John
 
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Reply: 1.2.2.1
From: Amber Kay


Hi All (particularly Dale),

I have just realised that we have made a big boo boo with how we have financed a property purchase.

We have a loan with redraw (not an offset) on an IP, and had 50k in a separate savings account. While we waited to purchase a home which we will live in next year, we moved the 50k into the IP loan as we figured we would save some interest over the month or so it would be there.

We have since redrawn this deposit and purchased the house. We do not plan to rent it out in the meantime (to save stamp duty) therefore it will be our PPOR. By putting our deposit on this loan and then redrawing it to pay for our future PPOR, have I just made the interest for the 50k unclaimable? Does the ATO take that 50k as now against the PPOR rather than the IP? I'm pretty sure it does am rather mortified that I didn't pick this up, as it will be about 7k that we cant claim over the 2.5 years that this property will be our home (before reverting to a renter). So in an effort to save about a month's interest on my IP loan, I have just rendered 50k of that loan unclaimable for the next 2.5 years!??

As far as I see it, the only options are to :
1. Suck it back and take the loss on the chin (another one of those learning things)
2. Pay the extra stamp duty and rent the property for 6 months before moving in (but will this mean the interest on the deposit can only be claimed when the property is a renter ie 6 months). But I think this option isn't that good either as the rent wont cover the lost 2 years of tax refund and I will probably regret the loss of CGT exemption at a later date.

Dale, or anyone else for that matter, can you confirm that I have stuffed up?
Does anyone else have any ideas as to options available to us?

Many thanks for taking the time to read this.
Amber
 
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Reply: 1.2.2.1.1
From: Dale Gatherum-Goss


Hi Amber!


>
>We have since redrawn this
>deposit and purchased the
>house. We do not plan to rent
>it out in the meantime (to
>save stamp duty) therefore it
>will be our PPOR. By putting
>our deposit on this loan and
>then redrawing it to pay for
>our future PPOR, have I just
>made the interest for the 50k
>unclaimable?

At face value, Amber, yes the interest on the $50k will not b tax deductible because the redraw has been used to buy your PPOR.

Does the ATO take
>that 50k as now against the
>PPOR rather than the IP? I'm
>pretty sure it does am rather
>mortified that I didn't pick
>this up, as it will be about
>7k that we cant claim over the
>2.5 years that this property
>will be our home (before
>reverting to a renter). So in
>an effort to save about a
>month's interest on my IP
>loan, I have just rendered 50k
>of that loan unclaimable for
>the next 2.5 years!??


Yes, I'm afraid that this is how I see it too.


>As far as I see it, the only
>options are to :
>1. Suck it back and take the
>loss on the chin (another one
>of those learning things)
>2. Pay the extra stamp duty
>and rent the property for 6
>months before moving in (but
>will this mean the interest on
>the deposit can only be
>claimed when the property is a
>renter ie 6 months). But I
>think this option isn't that
>good either as the rent wont
>cover the lost 2 years of tax
>refund and I will probably
>regret the loss of CGT
>exemption at a later date

Go for option 1, Amber.


>Dale, or anyone else for that
>matter, can you confirm that I
>have stuffed up?
>Does anyone else have any
>ideas as to options available
>to us?
>
>Many thanks for taking the
>time to read this.
>Amber

Sorry to be the bearer of bad news. Good luck

Dale
 
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Reply: 1.2.2.2
From: Rolf Latham


Hi John

You are right. Just having an offset account on the IP acct at this stage is of zero help.

I meant that of one sets this up from scratch that you go for a loan with an offset facility so that your excess cash is not parked in the loan, but in the offset facility. In that way, there is NO apportionment to be made btwn tax and non tax deductible debt, because its all tax deductible.

If you have cap growth that you are drawing on then a separate LOC split can be incorporated into the loan facility to still provide for a clean split. Top ups of existing facilties are at minimal cost with some lenders like Westpac for example.

ta

Rolf
 
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Reply: 1.2.2.1.1.1
From: Anonymous


Amber

one more option

3. claim the interest and if audited, claim you didn't know!
 
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Reply: 1.2.2.1.2
From: Rolf Latham


Hi Amber

You poor thing. Dont beat yourself up over this becaue you will find most bankies dont even know of this and it is supposed to be their job !

Ta

Rolf
 
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Reply: 1.2.2.2.1
From: Always Learning


Dear Amber

<p>

Don't worry, join the queue, including me who had been working off the same mis-assumption about a "Re-draw" account.

<p>

My suggestion and my current idea, is to suck it up now and then put in place a process to slowly "get-it-back" via the following method:

<ol>

<li>Focus every cent of your spare after tax income on your PPOR or offset account.

<li>Pay all IP related costs such as insurance, agents fees, repairs, inspections, IP courses, IP books, anything and everything from your mortgage redraw account. If your IP has a negative cash flow then the debt level of the primary mortgage account will increase eg. If you current have a balance of 100K, and "costs" of 10K per year (excluding interest) then at the end of next year your debt will have increased to 110K.

<li> In the above case (2). be careful about the interest charges. This is because you cannot capitalize on the interest as this is a tax no-no. i.e. interest on interest is not an allowable tax deduction. But as I understand it interest on the principle and interest on all costs (except capitalized interest) is fully deductible.

</ol>

<p>

Dale et. al. if I have mislead anyone here please tell me!

<p>

Thus over time you will see a slow "increase" in the debt level of the IP. But hopefully you will see a large(r) increase in the balance of you offset account or decrease debt on your PPOR<p>

Fundamentally it doesn't make sense to pay down debt on IP whilst you have debt on your PPOR or plan to have debt on a PPOR in the future so the moral of the story is to always use an offset account.

<p>

I hope this has reduced the confusion not increased it!
 
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Reply: 1.2.2.2.1.1
From: Amber Kay


Thanks Dale, Rolf and AL - your comments are much appreciated.

My hubby spoke to the ATO and the fella there recommended putting forward our case and asking for a private ruling. ie, we show that the 50k was always ours through saving, not borrowing and outline what sorry saps we are. Then we ask if they will forgive us our error and allow us to once again have that 50k recognised as against the IP rather than the PPOR and be able to claim the interest.

The ATO guy seemed to think it would be a reasonable request of the ATO. Does anyone have any experience with private rulings? Are we likely to win this one?

Thanks, A
 
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Reply: 1.2.2.2.1.1.1
From: Always Learning


That's sounds like a great idea! Basically you have nothing to loose, just your time!Please let the forum know, especially me about the outcome of the ruling!
 
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