Where to park money temporarily

[angel0death]

Hi. I've recently re-financed my current IP, which allowed me to increase my LVR from 60% to 80%.
So, I've basically got my 20% initial investment back.

My loan is with CBA, and I've got a MISA account tied to the loan account.

I'm still looking for another IP so that I can put the 20% equity to good use.
Hoping to get on by March.
Meanwhile, where should I be putting the funds?
In the MISA to lower the interest on my loan? But then, I won't be able to reduce my taxable income by much.
Or, should I just park it somewhere else (like a transactional account), so that I get to reduce my taxable income, and because the interest on transactional accounts aren't high, I don't have to pay so much tax off the interest accrued.
Or, should I put it in some sort of fix term deposit or savings account like UBank where it's high interest. But then, I'll have to pay tax for the interest accrued.

Still a newbie in all these, so excuse some bad terminology.

 

[Bigtone]

Hi. I've recently re-financed my current IP, which allowed me to increase my LVR from 60% to 80%.
So, I've basically got my 20% initial investment back.

My loan is with CBA, and I've got a MISA account tied to the loan account.

I'm still looking for another IP so that I can put the 20% equity to good use.
Hoping to get on by March.
Meanwhile, where should I be putting the funds?
In the MISA to lower the interest on my loan? But then, I won't be able to reduce my taxable income by much.
Or, should I just park it somewhere else (like a transactional account), so that I get to reduce my taxable income, and because the interest on transactional accounts aren't high, I don't have to pay so much tax off the interest accrued.
Or, should I put it in some sort of fix term deposit or savings account like UBank where it's high interest. But then, I'll have to pay tax for the interest accrued.

Still a newbie in all these, so excuse some bad terminology.

put it back in the loan and then redraw it when you need the depoist, u can't claim the interest on that extra 20% now because you have not used it for investment purposes

 

[Jake D]

Where is the money currently? Alarm bells are ringing with regard to the tax deductibility of the newly withdrawn funds. Is Terry W around here anywhere?

 

[angel0death]

Thanks Jake, thanks Bigtone.

The money is currently put in the MISA.
I was thinking that I could just reduce my monthly repayments since if I put the money elsewhere, taxman would just tax me on the interest I get from it.

 

[angel0death]

So is what I've done not good?
Is it bad?
I'm kinda freaking out a bit now.

 

[Jake D]

I was genuinely hoping Terry W would turn up. He seems to have the clearest explanation in this case.

My understanding, (please see my sig) is that once you re-draw funds and don't use them for investment then the interest on those funds is no longer tax deductible.

I believe
- if the funds are clearly in a holding account and used entirely for investment purposes, you may be safe.
- Storing them with non-investment related savings will ruin this (ie, if you have other money in the MISA as well)
- If they redraw is not it's own separate account from the initial loan,Putting them back into the account they are re-drawn from will not help as you can not simply "pay back just the redraw" and you will still have a large un-deductable portion of interest.

Don't take my word for it, though, i'm not the greatest source.

 

[Terry_w]

Oh no!

This one is coming up daily.

Borrowing to park money into a savings account could lead to being unable to claim the interest.

 

[Jake D]

Here he is. How's me response Terry? Close?

 

[angel0death]

Oh no!

This one is coming up daily.

Borrowing to park money into a savings account could lead to being unable to claim the interest.

Hi Terry.
What about if I put the money into the MISA that the loan account is attached to?

 

[Terry_w]

Yes, Jake pretty good.

Just think of it this way. Someone borrows money and then parks it in a savings account. The funds may be borrowed at 6% and invested at 4%. So this is not a commercial transaction. No interest deductible.

Once the funds are in the savings account they are no longer borrowed funds. So if you take them out to use the funds for investment purposes how could you argue the interest is deductible?

The answer is to claim there is a connection from the borrowing and the eventual use. This may or may not work.

If there are other funds in the savings account then you would not be able to trace the funds. They would be mixed funds - borrowed and cash. So at best you may be able to partially claim the interest at worst none of the interest.

Best to avoid this situation by using a LOC I think.

 

[Terry_w]

Hi Terry.
What about if I put the money into the MISA that the loan account is attached to?

This wouldn't change anything.

 

[7smurfs]

hrmm an interesting topic...

What if I purchase a place for $440k, I have 40k in the bank for deposit but borrowed $440k to 'in a sense' borrow 100% for the investment.

Reality is that I get my 40k deposit back and I put that 40k into an offset account.

Does this work?

 

[senji]

Hi Terry,

For CBA case, my understanding is, I am only allow to redraw by transferring the fund to smart access account which is a transactional saving account, then issue cheque from there. Based on your eplaination above it might cause problem in term of tax deductible? If yes what do you suggest on how to redraw for CBA loan.

 

[Terry_w]

hrmm an interesting topic...

What if I purchase a place for $440k, I have 40k in the bank for deposit but borrowed $440k to 'in a sense' borrow 100% for the investment.

Reality is that I get my 40k deposit back and I put that 40k into an offset account.

Does this work?

certainly not. You cannot reimburse yourself and claim interest. If you borrowed the $40k from a third party maybe.

 

[Terry_w]

Hi Terry,

For CBA case, my understanding is, I am only allow to redraw by transferring the fund to smart access account which is a transactional saving account, then issue cheque from there. Based on your eplaination above it might cause problem in term of tax deductible? If yes what do you suggest on how to redraw for CBA loan.

Yes, that will be a problem.

I suggest you set up a LOC instead.

 

[angel0death]

Thanks Terry.
My current loan structure is a bit different. It's in 2 parts.
The first part of my loan is basically of the same amount of my previous loan at 60% LVR.
The second part of the loan is the additional 20% LVR which I got when I refinanced.
Each of the 2 loans have a MISA attached to it.
Plus I have one transactional account.
The first loan is purely for my current IP. I've not repaid anything, nor put anything in its MISA. So, I'm assuming I'd be able to claim full tax off its interest.
For the second loan, I'm not using the money borrowed at the moment. So, I've put them all back into the MISA attached to this loan. My plan is to use it as a deposit for another IP in the very near future.
From what you mentioned before, I can't claim interest from this 2nd loan. I think it should be fine since I should be expect to have any interest from it. I have put the full amount back into the MISA.
It's just the first initial few weeks when I was still trying to open MISA accounts for each, and the money was parked in the transactional account. I probably won't be able to claim for whatever interest accrued during that period.

Guess I'd better look for another IP pronto.

 

[Terry_w]

For the second loan, I'm not using the money borrowed at the moment. So, I've put them all back into the MISA attached to this loan. My plan is to use it as a deposit for another IP in the very near future.
From what you mentioned before, I can't claim interest from this 2nd loan. I think it should be fine since I should be expect to have any interest from it. I have put the full amount back into the MISA.
It's just the first initial few weeks when I was still trying to open MISA accounts for each, and the money was parked in the transactional account. I probably won't be able to claim for whatever interest accrued during that period.
.

So you borrowed money and placed that money into a transactional account? And then from there back to the miser account?

I would argue that none of those funds are deductible, especially if your transaction account had other funds in it.

Is this second loan split from the first? ie separate loan account number?

 

[angel0death]

So you borrowed money and placed that money into a transactional account? And then from there back to the miser account?

I would argue that none of those funds are deductible, especially if your transaction account had other funds in it.

Is this second loan split from the first? ie separate loan account number?

Yup. Fair enough. From your previous point you made, it does make sense that it should not be deductible.

Both of the accounts are separate, with different loan account numbers.
So, the monies moving about for the second loan shouldn't affect the first loan when it comes to tax, yeah?

 

[Terry_w]

Yup. Fair enough. From your previous point you made, it does make sense that it should not be deductible.

Both of the accounts are separate, with different loan account numbers.
So, the monies moving about for the second loan shouldn't affect the first loan when it comes to tax, yeah?

First loan probably ok.

You should see an account about the second loan as you may still be able to claim it if you think you have a basis of tracing the money.

But I wouldn't set it up like this again as too risky.

 

[angel0death]

First loan probably ok.

You should see an account about the second loan as you may still be able to claim it if you think you have a basis of tracing the money.

But I wouldn't set it up like this again as too risky.

All the accounts are brand new. They opened new ones for me when I got the loan from CBA. I've not used the transactional money for personal use. I.e. nothing went out from the transactional account, other than into the MISA attached to the 2nd loan. The only incoming monies are from the rental from my current IP.
As for the 2nd loan, the only transactions are between its MISA and the transactional account. Again, the transactional account is only seeing external money coming in from the the rental income.

Any worries there?