Using own cash to cover bank delay, Tax implications ?

[wokka1]

Hi. long time lurker, first time poster.

I'm about to settle on an IP in Victoria and the finance application is stuck in the queue and will not come through before the (already extended) settlement date. It's also 50/50 if it will make it prior to the "14 day default and lose my deposit" period that exists in Victoria.

In order to avoid losing my deposit and the property it looks like I'll have to settle using my own funds and then reimburse myself and hand the title to the bank (via my conveyancer and broker) once the loan is ready to draw down.

My question is, having initially purchased the property with my own funds, will tax deductibility remain once I draw down the loan and reimburse myself the purchase costs (100 % borrow using equity in PPOR) ?

And yes, I did screw up a bit here...chose the lender with known application delays, figured 45 day settlement would be sufficient, didn't factor several public holidays in Vic at this time of year etc. I'll also be asking an accountant this question but thought some info may be available here.

Thanks,
Wokka.

 

[Rob G.]

Doesn't sound too good from what you describe.

If you pay for the property from your own savings, then later borrow to reimburse yourself, it will be deemed a personal borrowing and hence the interest will not be tax deductible.

You can't borrow from yourself.

Cheers,

Rob

 

[belleran]

I have been through this experience myself. The bank took at least 6 weeks to grant our LOC for land purchase. We had to settle with personal funds so now that part of our project is not tax deductible.

 

[wokka1]

Thanks for the replies,

So far broker and conveyancer saying I'll be OK as the loan was applied for before the purchase and I'm merely filling in the gap. Accountant however says I won't. I'm siding with the Accountant, and the advice here from people who have been in the same situation.

Hopefully the bank will come through and all the worry will have been for nothing but I'm not holding my breath.

It may come down to simply letting the deal, and my deposit, go (and possibly get sued down the track for the difference if the vendor sells cheap). Another is to buy anyway, hold for a short time then sell and kiss stamp duty and purchase costs goodbye. Holding without deductibility on interest repayments is not palatable.

Wokka.

 

[Tuppence]

We too had just this experience. Our advice from our broker and accountant was the following:
pay deposit out of personal funds. Inform agent of the situation and that the deposit would need to be replaced down the track. When LOC (in our case) came through, contact agent. Organise a new deposit out of LOC. Agent confirmed receipt of this, and refunded deposit to our account (different account) the next day.
Chain all intact for tax purposes - just a bit of faffing around and relying on the goodwill of agents (I never like to do that). cheers.

 

[Rob Williams]

So far broker and conveyancer saying I'll be OK as the loan was applied for before the purchase and I'm merely filling in the gap. Accountant however says I won't. I'm siding with the Accountant, and the advice here from people who have been in the same situation.

To state the obvious, this is a tax and accounting based issue.
The broker and conveyancer can say what they like. They cannot provide tax advice. They can provide advice on broking and conveyancing issues, for sure. But NOT tax issues.
You have no choice but to "side" with the accountant.

 

[tdh78au]

are you married or have a de-facto partner? If yes, then can they be worked into the equation? e.g. are your own funds actually your+partners own funds? can they purchase it using these funds and then transfer the title over to you down the track (which is stamp duty free transaction in victoria + you can use the lended funds to pay them back)? The challenge being that you may need to convince the vendor to allow change of name on title (unless you had the nominee clause in there already?) + your conveyancor to come to the party as well.

good luck ... hope it works out

 

[Rob G.]

We too had just this experience. Our advice from our broker and accountant was the following:
pay deposit out of personal funds. Inform agent of the situation and that the deposit would need to be replaced down the track. When LOC (in our case) came through, contact agent. Organise a new deposit out of LOC. Agent confirmed receipt of this, and refunded deposit to our account (different account) the next day.
Chain all intact for tax purposes - just a bit of faffing around and relying on the goodwill of agents (I never like to do that). cheers.

It all depends on whether you have a clear separate contract to provide temporary security which is clearly not any part of the purchase consideration.

i.e. if the funds are refundable, they might not be regarded as a deposit and hence not a part of the purchase consideration.

And of course ... the related transactions hopefully are not regarded as a scheme to gain a tax benefit for the purposes of Part IVA.

Get some advice on your individual circumstances/contract.

Cheers,

Rob

 

[Terryw]

I agree with Rob, the interest on the loan to replace your own funds won't be deductible.

Also agree with the other Rob that you should not take tax advice from a broker or conveyancer. It could be costly!

If you have the cash you can't actually lend it to yourself, but you may be able to lend it to someone else (or a trust/company) who can lend it to you = loan 1. This way when the loan does come you can refinance loan 1 with the new loan from the bank.

You had better talk to a lawyer about this as it could be dangerous!

 

[Shaneelastic]

Hi,
your accountant is right,
But, he should be offering you a answer for your situation
There could be a way around it, speak to him, im thinking an arms lenght loan agreement by an associated entity.

 

[wokka1]

The situation, at the moment, remains pretty much unchanged although it's now looking likely that my lender will either make settlement or run only a few days over which means the 14 days grace I have before I am defaulted will see me over the line.

It should have been finalised Friday but The Mortgage insurer came back wanting more details on the IP in Sebastopol. I was at an LVR of 83 % (with substantial cash reserves) so the simplest and most timely way around that was to inject some cash of my own to bring my LVR to 80 and cut mortgage insurance out of the deal all together.

I have an appointment with an Accountant next week (recommended on this forum) which is something I should have done long ago.

I appreciate all the suggested work arounds but I doubt there would be the time, nor am I learned enough (though I'm learning fast) to put them into place.

Will continue to update.
Wokka.

 

[Bigtone]

I once had a timing issue on sub-division which would have meant paying double stamp duty.

I got around it a with a stat dec signed before the transaction took place explaining that it was only a stop gap and the real intention was "abc".

Once 'abc' then came into place the sro respected their earlier ruling and accepted the stat dec. I think the tax office might do the same as you are not manipulating the system it is simply a timing issue.

In reality many people pay the deposit for an Ip from their own cash and in effect "pay themselves back" when the loan settles for the purchase and they have borrowed the full 106%.

While not technically correct I have never seen the tax office make an issue of this.

Cheers

BIGTONE

 

[Rob G.]

I once had a timing issue on sub-division which would have meant paying double stamp duty.

I got around it a with a stat dec signed before the transaction took place explaining that it was only a stop gap and the real intention was "abc".

Once 'abc' then came into place the sro respected their earlier ruling and accepted the stat dec. I think the tax office might do the same as you are not manipulating the system it is simply a timing issue.

In reality many people pay the deposit for an Ip from their own cash and in effect "pay themselves back" when the loan settles for the purchase and they have borrowed the full 106%.

While not technically correct I have never seen the tax office make an issue of this.

Cheers

BIGTONE

The principal of mutuality is firmly established in Australian Tax Law.

Cheers,

Rob

 

[wokka1]

All's well that ends well...I hope.

The bank and I ended up being able to make the extended settlement date, barely. Then the night before I get a call from my conveyancer saying settlement has been delayed, this time by the Vendor. Seems there was a typo in the their title documents.

Upside is I'm no longer liable for ANY of the penalty interest and settlement is rescheduled for this coming Tuesday. "Everything is in place" to quote my conveyancer, broker and the agent. So, come Tuesday the saga ends (fingers still crossed) and I start collecting rent on my first IP. Well, second, but I ended up moving into the first one.

Thanks for all your advice,
Wokka.