Good Afternoon,
I am currently in the process of refinancing my loans – one for IP and one for PPOR (which will become IP in the next 12 months).
My broker is proposing that, rather than borrowing the exact amounts that are outstanding on the existing loans, I borrow slightly higher amounts, pay out the loans + fees, then keep the rest available for redraw.
This sounds fine as I won't be paying interest on the money that isn't redrawn, only on the amount I have used to pay out the original loans. Is this correct?
I am aware that using any money from the loans for personal expenses is a big no no. However, would I be able to use the redraw facilities to pay for things like body corporate and rates on the IP and still keep it 100% deductible? I'm also aware that I shouldn't use the redraw facility to pay interest as the ATO might kick up a stink.
Anything else I should be aware of? I've had troubles finding anyone in similar circumstances as most threads I've read surrounding this issue seem to deal with redraw on a PPOR loan.
oscar1 wrote:My broker is proposing that, rather than borrowing the exact amounts that are outstanding on the existing loans, I borrow slightly higher amounts, pay out the loans + fees, then keep the rest available for redraw.Use an "offset" instead of a redraw and you won't have any tax deductibility issues.
The PPOR loan should also be set up as IO if it's going to become an IP in the future. Use the offset account against this loan to drop any spare savings in.
I trust the broker is also keeping the securities separate?
Cheers
Jamie
Jamie Moore | Pass Go Home Loans Pty Ltd
http://www.passgo.com.au
Email Me | Phone MeMortgage Broker assisting clients Australia wide Email: [email protected]
I should have mentioned that my PPOR is already linked to an offset account and will remain so with the new lender.
Both loans are currently IO and will remain this way with the new lender.
Loans are not cross collateralised.
Jamie M wrote:Use an "offset" instead of a redraw and you won't have any tax deductibility issues.If I were to put the 'extra' funds from the higher loan amounts into an offset account then I would definitely have tax deductibility issues as I would be mixing with the personal funds already in my offset account.
oscar1 wrote:Jamie M wrote:Use an "offset" instead of a redraw and you won't have any tax deductibility issues.If I were to put the 'extra' funds from the higher loan amounts into an offset account then I would definitely have tax deductibility issues as I would be mixing with the personal funds already in my offset account.
Yep, you would if you placed them in the offset against your PPOR.
Cheers
Jamie
Jamie Moore | Pass Go Home Loans Pty Ltd
http://www.passgo.com.au
Email Me | Phone MeMortgage Broker assisting clients Australia wide Email: [email protected]
So am I able to use the redraw facility to pay for outgoings other than interest on the IP without the ATO kicking up a fuss?
Has anyone else borrowed extra on a refinance for a similar purpose?
You would have to pass the Part IV assessment of the ATO anti-avoidence rules. If you were paying as much as you can into your PPOR and using redraw to pay for IP expenses then the tax deductability may be diallowed. It sounds like the same principle as capilising investment property interest while paying down a PPOR loan, which is generally not allowed. By the souds of things the reason why you are doing it is to save tax.
Having said that, I am sure there is a way around it and a good acocuntant would be able to find a way.
Cheers,
LukeOne way of doing it is to argue that the reason you are doing it is to be able to hold on to the properties, and not to save tax. It might be prudent to get a private ruling on it to be sure.
Cheers,
LukeFew comments:
If you borrow extra and leave it in redraw it will be treated as a new loan once money is withdrawn from the redraw. Deductibility will depend on how the funds are used. If you take money for rates etc then it would generally be deductible. But if you transfer the money from redraw to an offset account to write a cheque, then the interest would not generally be deductible as the funds would no longer be borrowings.
It won't be a good idea to take money from the same loan as your PPOR debt unless it is a different split. This would be mxing loans and you could still claim some of hte interest but it will be messy to work out and other problems if you are paying PI.
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
luke86 wrote:One way of doing it is to argue that the reason you are doing it is to be able to hold on to the properties, and not to save tax. It might be prudent to get a private ruling on it to be sure.Cheers,
LukeThat's my thinking. I don't plan to start paying all outgoings from redraw but, should cash flow ever get tight, I imagine the ATO would allow a couple of payments.
Terryw wrote:Few comments:If you borrow extra and leave it in redraw it will be treated as a new loan once money is withdrawn from the redraw. Deductibility will depend on how the funds are used. If you take money for rates etc then it would generally be deductible. But if you transfer the money from redraw to an offset account to write a cheque, then the interest would not generally be deductible as the funds would no longer be borrowings.
It won't be a good idea to take money from the same loan as your PPOR debt unless it is a different split. This would be mxing loans and you could still claim some of hte interest but it will be messy to work out and other problems if you are paying PI.
From what I've read, it should be ok to empty a transactional account, place funds equal to the outgoing amount in there, then pay the outgoings on the IP. This way I'm not 'mixing urine with water' so to speak.
I will certainly not be redrawing from the PPOR loan whilst the property is still my PPOR. But once it converts to an IP in the next 12 months this will be a different story.
I odn't think part IVA could apply unless you were paying interest with further borrowings in a scheme like fashion to enable you to pay down your PPOR loan faster – and even then only maybe.
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
oscar1 wrote:Terryw wrote:Few comments:If you borrow extra and leave it in redraw it will be treated as a new loan once money is withdrawn from the redraw. Deductibility will depend on how the funds are used. If you take money for rates etc then it would generally be deductible. But if you transfer the money from redraw to an offset account to write a cheque, then the interest would not generally be deductible as the funds would no longer be borrowings.
It won't be a good idea to take money from the same loan as your PPOR debt unless it is a different split. This would be mxing loans and you could still claim some of hte interest but it will be messy to work out and other problems if you are paying PI.
From what I've read, it should be ok to empty a transactional account, place funds equal to the outgoing amount in there, then pay the outgoings on the IP. This way I'm not 'mixing urine with water' so to speak.
I will certainly not be redrawing from the PPOR loan whilst the property is still my PPOR. But once it converts to an IP in the next 12 months this will be a different story.
I would even be wary of using an account with no funds. Once the borrowed funds hit it they are no longer borrowed.
Be careful with withdrawing from the PPOR loan.
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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