WPC premium option home loan problems

[MC98]

Hi Folks,

9 months ago I rented out a property that I had previously occupied as a first home owner.
The initial mortgage was a westpac premium option home loan where salary was depositd into the home loan account and general living expenses were taken out via a monthly credit card funds transfer.

I have recently completed the first tax return as an invester and was most dismayed to find that there are a significant number of problems with the current structure of the loan.

Basically, I have been mixing up private and investment transactions in the one account( the home loan account).

This has caused some problems for the accountant in apportioning the interest claimable as a deduction .

In addition every withdrawl from the home loan account ( really all just for living and not for the property) further reduces the percentage of interest claimable.

If I continue like this in the not to distant future I wont be able to claim any portion of interest as a deduction.

Of course I intend to separate the investment from private transactions however I am unable to see a method for reinstating 100% deductability on the interest paid.

Has anybody else had a similar experience and/or have some notion of what might be done to solve the above problems?

Is it worth approching the Tax office?

regards

MC98

 

[BV]

Hi MC98,

I am suspecting that this problem wouldn't be very common.

To my understanding your Westpac premium option loan is basically a LOC
and as such every withdrawl you make for private purposes
will make the interest on that amount not tax deductible.

A LOC in the eyes of the ATO is like a variable loan.
If it goes down that's ok, if it goes up they look at the reason it went up and if the purpose for the withdrawal was not for investment purposes then you lose the tax deductibility on that amount.

For example, If you have a $100K loan and during the year you made 50
withdrawls of lets say $1000 each time, at the end of the year
your tax deductible portion of the loan will be $50K.

What can you do about this?
I would get on the phone to Westpac right now and change to a different type of loan before you lose all your tax deductibility.
Or you can e-mail one of our reputable brokers and refinance your existing loan.

Cheers

 

[Debt Junkie]

Is it worth approaching the Tax office?

Nope, it's been tried before and the ATO aren't willing to come to this party.

You have several options as listed by BV.

You could also just get an extra bank account to have your salary put into, get the loan payments to move automatically each month from your new account to you loan account. Then, whatever is left in your new account each month gets transferred to reduce the loan.

It's not as effective at reducing interest as your original loan, but that sort of loan works best for PPOR (if you are disciplined), and isn't really as relevant when it's an IP and the tax is deductible ...

DJ

 

[Rolf Latham]

Hiya

Stuck with it

From here convert to the Rocket Repay Home loan with IO 100 % offset account ..................might be worth doing some sums to see whats what of the original debt, if any is left

ta
rolf

 

[Les]

G'day MC98,

Ouch !! Yeah, as Rolf said, you need to set up an Offset Account. The beauty of these are that the original mortgage remains unchanged, but every dollar in "offset" is reducing the interest payable. AND, the amount in the Offset account can be removed for Personal purposes without stuffing up the whole accounting side of things.

It's a hard lesson to learn - there have been some very good posts in the past re this very thing (I think some might even be "stickies" - so you will always see them "at the top of the page" in any forum).

Happy hunting,

Regards,

 

[BV]

MC

One more thing, in order to regain the tax deductibility you will need to either use funds from the LOC
as a deposit for your next IP or you will need to sell the existing IP and buy another 1.

If you go for option 2 you will have selling and buying costs so most people would choose option 1.

Good luck