Urgent Help RE: Tax deductability of deposit

[Pete_d]

Hi Somersofters!

I've got a query regarding the deductability of a deposit. Here is the situation

Purchased a IP (my first) in a private treaty on the weekend, a 10% deposit is due tomorrow. I have the funds available in an offset facility on my PPOR loan and intend to finance 100% of the PI through debt including costs, agreed with the bank. The funds from the bank will not be available tomorrow so I will need to use fund from the offset.

Will it be tax deductable is I use this from the offset, or do I need to put the funds off the loan and redraw to get the deductability. Or is there another way to do this and retain the 100% tax deductability on the new IP


Thanks

 

[Peter_Tersteeg]

I take it that at settlement you'll have the 10% available in the loan redraw and the loan will cover the full purchase price plus buying costs (stamp duty etc)?

Move the same amount of money that you paid for the deposit from the new IP loan to your offset account at settlement. No more, no less. This creates a clear paper trail if you're ever audited.

Don't bother trying to claim the interest on the deposit between now and settlement, it's likely to be minimal and will only confuse the ATO if it's ever questioned. You should be entitled to claim the interest during this period, but it's more likely to create problems.

Check with your accountant to verify they're ok with this before proceeding.

Next time you plan purchase a property, see an investment savvy broker first to structure your finances so you've got a fully deductible deposit up front and you're not cross collateralised.

 

[Pete_d]

Thanks Bear

 

[Terryw]

If you take money from an offset account it is not borrowings, so there is no interest to deduct. Your PPOR interest bill will go up however.

The trouble is you are borrowing 100%, but paying 10% in cash. You won't be able to substitute this 10% for borrowings from a tax point of view. So the net affect may be 90% of the loan interest deductible.

 

[Evachange]

What about using a deposit bond?

That way you don't have to use your cash.

Just a thought.

 

[amsaini15]

If you take money from an offset account it is not borrowings, so there is no interest to deduct. Your PPOR interest bill will go up however.

The trouble is you are borrowing 100%, but paying 10% in cash. You won't be able to substitute this 10% for borrowings from a tax point of view. So the net affect may be 90% of the loan interest deductible.

I think I have messed up with my 1st IP purchase in that case. Refinancing of PPOR was taking time and I had to pay for the 5% deposit from offset on my PPOR which I replaced it back once refinancing was done. Any solution to ensure 100% tax deductibility still? Can I still show trail of transfers to ATO to prove my point?

 

[Terryw]

What it seems you did was pay 5% deposit with cash by taking it from your offset account. ie it is not borrowed money. Now you want to borrow to replace this cash. I can't see how the interest on this new borrowing (to replace the 5%) could be deductible because you are using it not for investment purposes, but to put into a 100% offset. account.

Its like paying cash for a house and later borrowing and saying you are replacing your cash - the loan would not be deductible.

 

[Rob G.]

What it seems you did was pay 5% deposit with cash by taking it from your offset account. ie it is not borrowed money. Now you want to borrow to replace this cash. I can't see how the interest on this new borrowing (to replace the 5%) could be deductible because you are using it not for investment purposes, but to put into a 100% offset. account.

Its like paying cash for a house and later borrowing and saying you are replacing your cash - the loan would not be deductible.

Hi Terry,

An example of the principle of mutuality.

Cheers,

Rob

 

[Terryw]

Hi Rob

Do you mean you can't borrow money from yourself?

ps. I still owe myself $50 from last week.

 

[amsaini15]

What it seems you did was pay 5% deposit with cash by taking it from your offset account. ie it is not borrowed money. Now you want to borrow to replace this cash. I can't see how the interest on this new borrowing (to replace the 5%) could be deductible because you are using it not for investment purposes, but to put into a 100% offset. account.

Its like paying cash for a house and later borrowing and saying you are replacing your cash - the loan would not be deductible.

Terry
I checked this Taxation Ruling -

Income tax: deductibility of interest on moneys drawn down under line of credit facilities and redraw facilities
http://law.ato.gov.au/atolaw/view.htm?docid=TXR/TR20002/NAT/ATO/00001

and as per points 22,23 and 34

Redraw facilities
22. The deductibility of interest on a further borrowing of money under a redraw facility depends upon the use to which the redrawn funds are put.
23. Where the original borrowing is for non-income producing purposes and the taxpayer uses the redrawn funds wholly or partly for income producing purposes, that part of the accrued interest attributable to the redrawn funds used for income producing purposes is deductible.

Further borrowings
39. Where a loan facility allows for redraws of extra repayments, we consider those redraws constitute new borrowings of funds that cannot be traced to the extra repayments. In this regard the term 'redraw' is a misnomer. It is in effect a new borrowing of funds. Similarly, a draw down on a line of credit that has not been fully drawn is a new borrowing of funds.

Redraw means new borrowing... What do you say?

 

[Terryw]

Terry
I checked this Taxation Ruling -

Income tax: deductibility of interest on moneys drawn down under line of credit facilities and redraw facilities
http://law.ato.gov.au/atolaw/view.htm?docid=TXR/TR20002/NAT/ATO/00001

and as per points 22,23 and 34

Redraw facilities
22. The deductibility of interest on a further borrowing of money under a redraw facility depends upon the use to which the redrawn funds are put.
23. Where the original borrowing is for non-income producing purposes and the taxpayer uses the redrawn funds wholly or partly for income producing purposes, that part of the accrued interest attributable to the redrawn funds used for income producing purposes is deductible.

Further borrowings
39. Where a loan facility allows for redraws of extra repayments, we consider those redraws constitute new borrowings of funds that cannot be traced to the extra repayments. In this regard the term 'redraw' is a misnomer. It is in effect a new borrowing of funds. Similarly, a draw down on a line of credit that has not been fully drawn is a new borrowing of funds.

Redraw means new borrowing... What do you say?

Yes I agree. Redraw is new borrowings.

 

[Terryw]

I just read back a few posts and see Amsaini took money from the offset account - this cannot be new borrowings because the offset account is not a loan, but a savings account.

 

[amsaini15]

I just read back a few posts and see Amsaini took money from the offset account - this cannot be new borrowings because the offset account is not a loan, but a savings account.

Ok So conclusion is Redraw is deductible but offset is not. My lender does say it provides offset in-built into loan, but as clarified before, it is not as same a offset account. It is actually a redraw facility only. I think I should stop calling it offset to end confusion

From Lenders website:
Offset Yes (100% offset facility built into loan account)

Now the question is replacing borrowed funds with another borrowed funds is tax deductible?

Also just wondering what can people with offset account do in this situation as the creator of this thread. They have to structure their loan but what if 10% deposit has to be paid asap (before re-structuring)?