gday,
a little scenario for the more informed than myself.
I currently have an IP interest only loan LVR 80% secured against the IP.
I have another loan 20% + the purchase costs of the IP interest only secured against my PPOR.
(no x collat and fully tax deductable with ease of servicability was the strategy)Im coming into a chunk of cash I need to park somewhere for a while.
couple of options;
1. If i refinance the 20%+costs to a LOC and park some spare cash there and later withdraw for öther purposes, say a boat, is the interest on the LOC still deductable or am i muddying the waters ?
2. refinace the 20% +costs to P+I loan with offset, however the repaymenst will be higher when i take my money elsewhere affecting servicability (not so keen on this)open for comment…..
thanksQuestion 1 – No, the interest will no longer be deductible. (Assuming the boat is used for private use). Basically, you will have paid out the IP LOC, and borrowed for a new private asset.
Why not just put the funds into an offset account against the 80% IO loan, until you decide what to do?
do lenders offer IO loans with offset ? My understanding was offset accounts can only be linked to P+I loans, unless I need to "have little chat" with my broker………………
Hi Dan42 – Interest only with off-set is available with most lenders. I recently had a client run in to a problem using off-set like this. He had a 300k investment loan and 301k in offset – he paid no interest for 3 years. When he eventually used the funds in off-set for a new home he assumed it was tax deductable as the loan had not changed. When he was audited the auditor did not allow the deduction as the cost (interest) only occurred after the funds were drawn out of off-set account – therefore they now associated the cost to the new purpose. It was new to me and I've been a banker for 10 years. Best not rely of a banker or brokers advice – talk to a tax accountant.
DS
Yes many lenders do offer 100% offset with an interest only loan and we structure most clients loans that way even if it is there PPOR.
Banker FYI Dan is a Tax Accountant.
Richard Taylor | Australia's leading private lender
Hi Richard – comment was actually meant for Dirty not Dan however I’d be interested in Dans feedback – and yours.
If a client has funds in off-set for three years equal to the amount of the investment loan and therefore does not pay interest – is future interest changed once offset funds are used for personal use still deductable – according to the ATO in my scenario they said no?
Key point being the expence was non existant for three years. The pursonal use triggerred the expence. What are your thoughts and is It not atleast a grey area?
No hate to say i agree with the ATO on this one.
Richard Taylor | Australia's leading private lender
thanks for the input.
That is an interesting one. The general principle is that the funds are in a separate account, which doesn't change the loan amount and the purpose of the borrowing. When funds are withdrawn from the offset, the only change is that interest is now calculated on a higher amount, due to less funds in the offset.
The ATO would probably argue that the loan has in effect, been paid out, and the withdrawal is a new loan. Probably the time the funds were in the offset and the fact that there was no interest for 3 years were also factors.
I agree it's a grey area, because, according to the general principloes, it would be deductible. But other factors have caused the ATO to deny the deduction. Where is the line drawn?
I personally think your client would have an arguable case. I'm not saying he would win, but he could put up a good case for the deduction.
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