Forum Replies Created
- Terryw wrote:Thats good,
but considered the tax ruling mentioned by Ashley?
I have, the only time it will get interesting is when I take all the money out of my interest offset and buy my PPR. Then I will be shown to be engineering tax benefits by letting the investment loan redraw on itself and hence the interest charged following the redraw will be greater.
This I will chat to my accountant about, as I am not planning to buy a PPR until next year.
Yes correct, so interest charged only on the 9% of the total savings will be tax deductible since only that 9% of that total savings can be traced as being redrawn for the interest payment.
I’ve spoken to my bank and they’ve agreed to let the loan redraw on itself to pay itself off. There will be no interaction with my offset account what so ever from this point forward.
Terryw wrote:I would imagine it would be like this:You have $10,000 in savings in the offset. You borrow $1000 and place in into the savings. total $11,000.
Of this $11,000 only $1,000 is borrowings = 9%
So when you take $1,000 out to pay the interest only 9% of this is borrowed funds. So only 9% of the interest on the $1,000 borrowed would be deductible.
This is just the first month, try working it out for the second and it gets more mixed.
Sorry, can you please explain further? Are you saying that interest is only deductable on the $1000 in my savings account out of the $11000 that is in there?
Terryw, how would they calculate the tax deduction available on borrowed funds vs savings?
If you have pulled the interest payment from the loan the night before and placed it back on the loan the day after, the interest charged on the loan will not be any different to what would have been charged if you paid the interest payment without redrawing.
hahaha nice analogy…
At the end of the day, interest will be calculated annually and deducted at tax time. The total interest charged on my loan will be some interest $x. The rental income will be $y.
The tax deduction will be based on $x – $y – expenses. I can show by way of transaction history on both my offset and home loan accounts where the money is going once redrawn off the loan. I’m sure $x charged on the loan will still be fully tax deductable.
Rob G. wrote:Money borrowed to pay interest on your investment loan would usually be an allowable deduction.
The problem is the temporary redraw and parking with private funds (in the offset account) causes loss of traceability.
e.g.
$10k private funds in offset account.
$10k interest payment is due. Redraw the day before and park in offset account.
When you take the $10k out of your offset to pay your interest, this will consist of $5k private funds already in the offset plus $5k sourced from you IP loan. You CANNOT CHOOSE which portion you withdraw.
So your IP loan has increased by $10k (redraw), but only $5k of that principle is related to an income producing purpose. The other $5k remains in your offset account to replace the savings used from the latter account.
Over time, your IP loan will increasingly become mixed up with private purpose funds.
Regards,
Rob
How will it consist of $5k private funds and $5k sourced form the loan? I am redrawing the entire $10k from the loan and paying the loan interest payment with that redrawn $10k. The balance left in my offset account is as it was before I made the redraw.
I see your points, thank you for the advice. But it’s quite obvious from the transaction history that I re-credit the loan for the entire original redrawn amount.
If I were to pay the interest every month out of my own pocket, the interest charged on my loan would be the same. For example:
Outstanding loan balance: $200k, interest charged 7%*(200k-offset_balance) = $1.108k; (assume offset_balance=$10k)
If I redraw the loan for this payment:
Redraw loan: $1k, Re-credit loan $1k, New loan balance: $201k, Interest charged 7%*(201k-offset_balance) = $1.114k (assume offset_balance = $10k)If I pay the interest out of my own pocket, without redrawing:
Outstanding loan balance: $200k, interest charged 7%*(200k-offset_balance) = $1.108k; (assume offset_balance=$10k)
Credit loan $1k from offset account, new interest charged = 7%*(200k – offset_balance) = $1.114k (assume offset_balance is now $8.886k)You’re saying the ATO will not allow me to deduct full interest at tax time if I take the first approach? I keep a log of what I redraw the loan for and it is quite obvious on the transaction history where the money is going.
Just to complicate the situation a little further, my minimum redraw amount from my loan is $2000. I have to redraw $2000 everytime I want money off the loan. Aside from redrawing the loan for interest payments every month, I also redraw it for the propertys bills, rates and repairs. I’ve just received a $1000 bill for installing a new air conditioner, if I redraw $2000 from the loan, pay the air conditioner repair man $1000 from this $2000 redraw then re-credit the loan with the remaining $1000 from the redraw, is the interest charged on this $1000 tax deductible?
I’m sorry guys, I’m really lost as to how to best deal with my situation and my appointment with my accountant isnt until November. Any advice provided will allow me to sleep at night until then.
The $10k is savings, but its offsetting the loan interest…
P.S. is there any way to increase the principal owing on my investment property and still claim full tax deduction on the interest charged on the new loan amount, without redrawing it all and having to utilise that money for investment purposes? (ie. renovation)
It enables me to keep maximum funds in my offset account readily available at any time. There is no mix between borrowing and savings as anything that comes off my loan goes straight back on.
I am increasing the principal on the loan though by doing this… If I eventually buy my PPR and use funds in my offset account to purchase that, is the interest charged on this increased principal amount on my investment property still tax deductable?
Sorry for the confusion, here is how I manage my loan:
Current balance $185k, Total loan amount: $250k
The loan is an interest only loan, I have an interest offset account linked. Currently I have $10000 in my offset account, which I use for day to day purchases.
Once a month interest is charged on my loan, last month it was ~$1100. I redraw $1100 from the loan the day before interest is charged into my offset account. The loan sucks that payment up automatically from my offset account.
Apart the night before, there is no money from my loan in my offset account ever.
1. I only place money into my offset account from the loan, which then I pay back to the loan as part of the mandatory interest payment. No money sits in my account from the loan (only momentarily until the interest payment is taken). I do have personal funds in this account. I never redraw the loan for personal use.
2. I do not default on the loan, as the interest payment is paid from my offset account with the redrawn funds.
well I just installed an air conditioner the other day and had to cart all my tools in my sedan… I'm also planning to do some gutter work soon which will require more carting of tools/parts to and from home to the investment property… what sort of proof do you need?
So if my expenses were say $5000 (deductable) and my rent income is $3000 and my income is $80000, the amount of money i will pay tax on this year is $80000 + $3000 – $5000 – (work related expenses) ?
Thanks for the response, I’m really spewing I’ve made this mistake.
I’m now thinking of doing a renovation on the investment property and redrawing the loan back to its full extent ($210,000). Can I extend my investment loan back to what it would be if I only placed 20% deposit ($248000) and utilise a total of 248000-190000 for a renovation?
That way there will be $58000 which is tax deductable.. Does anyone have any other suggestions on how I can improve my tax situation atm?
Keeping it simple is all well and good, but transferring these properties later if I decide to set up a trust will cost alot more than the additional costs that may be incurred now.
The way I see it, if I have collateral (30% cash deposit) for a line of credit from the bank (not a home loan), then the bank does not care how I use this money to invest? Whether I invest it into a hybrid trust or whether I invest it into Joe’s investment scheme down the road?
The loan will still be under my name, using my collateral to invest in something which I think will show a good return. That’s all the bank has to know?
Thanks for that, very useful information indeed.
The last question I have is, I have about 30% of the market value for the house price I am looking at in cash. Will the banks want to use the house I purchase as security for the loan (in addition to the 30%)?
The reason I ask is, if I take out a loan to buy units in a trust, the house will be under the trusts name and not mine. Can you use the units as security? Or will the banks not look kindly on this when lending.
