Protection is a different matter.
If you lend money to someone it is still yours – but you may still be able to claim interest.
If you gift money it is no longer yours – but you can't claim any interest.Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
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Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
That is not what we are talking about here. We are talking about setting up a LOC on a property. I can't see how what you have written is relevant.
Paying money into a loan will have tax consequences. Domjan was about withdrawing money and parking it mixed in an account which already contained money. The result was a break in the chain of the borrowed money and the eventual investment. This is a different matter (though important).
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
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Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
The three points I mentioned where very relevant, in the one you have mentioned, if the person has extra cash- Where do you want them to park this?????? I would like to offset this with existing investment loans.
Anyway, I am not trying to educate you, but suggesting there are many ways to skin a cat.
Thanks number 8. The original poster did not indicate she/he did have extra cash, but if he did then:
The cash should be put into a 100% offset account and not into the LOC or a loan – otherwise there may be tax consequences if you want to take that cash out. Ideally the offset account should be attached to the non-deductible loan (if there is one) so as to save non-deductible interest.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
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Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Hi Terryw, yes, we do have an offset accout on PPOR, so all our funds go into that….so this LOc would only be used for investing purposes. The rent on our existing IP, and any new ones, will be paid staright into the offset account also. Thanks
Ez, thats how it should be done.
Also speak to your tax advisor about how to borrow other investment expenses from your new LOC to free up even more cash to put into your offset and save you even more interest and tax.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
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Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Thanks Terry, thats great advice. Really apprecaite your help
I would still recommend an offset account attached to the investment loan:
Two reasons:
1. When taking a loan increase due to an increase in equity the money can be separated from the existing. The equity can then be used and separated for investment / business purposes and for personal use.
2. If the PPOR is paid down, you now have a place to deposit cash without paying down your investment loans (you can then remove this money at a later date maintaining the investment balance and tax deductible status).I cannot stress that LOC's can be mirrored (provide the same benefits) by using a standard loan with offsets with the added advantage of flexibility (as mentioned above in point 1 and 2) and lower interest rates (should not be the only factor, but is a bonus).
But where would you deposit the money on the draw down of the loan before it is to be used?
I too would generally prefer an IO loan with an offset – but only if the money will be all used at settlement.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
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Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Back into the offset of the I/O loan from investment property that the equity is taken, sometimes setting up several offsets as is applicable to where and how the money is being used.
Money does not need to be used at settlement, I like to keep the money available for a rainy day……. If the property market trends backwards, then you buying power is increased provided you meet serviceability (as one example of why I would do this).
What about the implications of Domjan?
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
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Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
It is an offset account, not the loan account……. that's why, "No" to LOC.
Domjan redraw was from her loan account to her personal cheque account…..
in Domjan the person took money from a loan and parked it in a savings or cheque account. They then took the money from the account to invest it in property. The ATO denied the claiming of the interest because the money used to invest wasn't borrowed. It come from a savings account. They essentially borrowed money to invest in a savings account.
However, Domjan already had money in the savings account, so she mixed the money borrowed with money not borrowed.
It may be still deductible if you use a new offset account with absolutely no mixing of borrowed and non-borrowed money. But could be very risky. Why not be sure and just use a LOC. Once the LOC is fully drawn down it could be converted to an IO loan and an offset attached.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
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Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Wilma Domjan of the ACT had a claim of additional interest denied b/c she had money redrawn from the loan account into her personal cheque account to pay a bill for her rental property.The ATO successfully argued that mixing the borrowed money with her personal savings she could not clearly show the money that was redrawn from the loan had been used for.
Although not related to what we are talking about, borrowing to invest in a savings account is allowable tax deduction if it provides an income.
Nil risk, i.e. Investment loan A = $200k , new advance = $50k (put into offset account). If this money is used at a later date for an investment, there will be a paper trail from the offset account showing the $50k was used as a deposit for investment property B,
If you wish to use $20k and leave $30k, then set up two offsets (maybe one for personal and one for investment/ business). In this event there is no need to convert the loan at a later date. An LOC does not allow this.Essentially we are saying the same thing in relation to Domjan.
I think your example would probably pass with the ATO.
But what if a person draws down money and temporarily parks it into an offset account and then gets their wages or rents or other money placed into the offset account and then later takes money out of that account don't you think there could be a problem with the deductibility of interest on the initial draw down?
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
I would set up another offset to avoid this confusion, This would ensure the money has never been paid down from the initial draw down.
One could also argue the purpose of the loan from particular dates with a paper trail. Could the purpose of the loan not start from a certain date?
That is a very good point….
Yes, that should be ok.
Who knows how many people out there have gotten themselves into trouble (as yet probably undetected).
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
At least we have done our bit, we given food for thought for many investors…..
Signing off for today….
Hi All, thanks for the information but I am a little confused…..! So, to clarify are you saying that another option for me may be to take out a standard extra loan on my IP with an offset account attached. Then deposit all loan funds into the offset account to use for other investments. Then seperatly, still have my PPOR, with attached offset account and have all investment rent, etc deposited into this. Is that correct? if so, I'll put that option to my accountant too. Thanks again
Yes, that is an option. But just don't mix any money with the borrowed money in the offset. Get your accountant's go ahead first.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
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