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Category Archives for "Borrowing/Loans"

12 Months Imprisonment with withdrawing from a Loan – Contempt of Court

Not complying with court orders can lead a person to get into serious trouble.

In a recent case relating to a family law property settlement the husband was sentenced to 12 months imprisonment because:

– he withdrew $231,807 from a loan account, and then

– failed to make 48 months of repayments as required

The wife was to receive the house unencumbered (and the husband other assets) and the 48 monthly repayments were required to pay out the loan and discharge the mortgage.

The husband blamed his failing business for his need to breach the court orders.

The wife was the one who brought proceedings to court.

See:

Parrish & Gallejo (No.2) [2018] FCCA 2851

http://www.austlii.edu.au/cgi-bin/viewdoc/au/cases/cth/FCCA/2018/2851.html

Loan Tip: Outgoing Lenders Deliberately Delaying Refinances

When a person refinances their loan from one lender to another the mortgage must be discharged with the outgoing lender – the one they are moving away from. This means a ‘mortgage discharge’ form needs to be signed and submitted to the outgoing lender.

In the old days faxes went missing and forms were never received and this allowed the outgoing lender to delay the settlement.

These days it seems forms still go missing even though they are emailed in. But recently we have had one where the client’s signature on the discharge form apparently did not match the signature on the banks records. The client had to go into a branch to show ID and prove it was them to submit the discharge form.

Another, actually the same lender, wanted the spouse to sign the discharge form too, but she was not on title and could not have given a mortgage, but she was a borrower.

In both cases it was the day of the proposed settlement that this happened.

Another non-bank lender – but under a company owned by the same bank above, they have developed their own special discharge form which is not available online. The client must ring them up to get the form sent to them. This allows the lender a last attempt at discouraging them from leaving by making further offers of discounts etc.

These tactics appear to be

a) delaying tactics to allow the outgoing banks to get more interest, and

b) making it hard to leave discourages people from leaving, and

c) it is a form of punishment for leaving

When refinancing where funds are needed for settlement of another property, I suggest you get in early, send the discharge form even before your new loan is approved.

If there are any delaying tactics ring the lender’s complaints section, and threaten reporting them to the AFCA Home – Australian Financial Complaints Authority (AFCA)

I should add one way around this is to use a ‘fast refi’ type process where the new loan settles without the discharge of the old mortgage. A few lenders offer this, and the first thing the old lender knows about it is the repayment of the loan by the new lender, then the discharge of mortgage.

See discussion at

https://www.propertychat.com.au/community/threads/loan-tip-outgoing-lenders-deliberately-delaying-refinances.41658/

Indefeasibility and the Torrens System

I don’t advise on property law, but this topic is relevant to asset protection.

The Torrens system of registration of title for real property was first introduced in the late 1800 and it has slowly been replacing the existing system since then. The existing system of title is known as ‘old system title’ and it was complex and cumbersome.

In old system title when a property was sold the ownership had to be proved by both the physical title and locating all the previous transfers relating to that title. Sometimes documents went missing and it was a real pain in the arse being both time consuming and costly.

Torrens was introduced as a system of registration to replace all of this. The name registered on title was the legal owner. This is enough proof.

Indefeasibility refers to the fact that what is registered on title is proof. So, a registered owner is proof of legal ownership. A registered mortgage is proof of the legal mortgage. It is said to be a ‘system of title by registration’.

But this doesn’t mean registered ownership takes priority in all cases.

An example is fraud. Where title to a property is fraudulently transferred to someone else then them being registered owner does not mean it is indefeasible. This can happen with mortgages too. There is a recent case where one spouse mortgaged a jointly owned property to borrow money by forging the signature of their spouse. Since this was fraudulent the lending bank could only recover half of their money.

Keep in mind that there are also unregistered or equitable interests. The legal owner may not be the beneficial owner of a property. This happens where they are acting as trustee under an express trust, such as a discretionary trust, or where a trust is implied such as a resulting trust. In these cases the courts will enforce transfer of title based on equitable grounds.

Then there claw back provisions in various legislation such as

  • S 37A of the Conveyancing Act NSW (and other state equivalents)
  • S 120 to s121 of the Bankruptcy Act
  • Family Law Act
  • Succession Acts

Title of a property might be held by person A but the courts can reverse this and transfer it to person B and then to creditors, spouses, missed out beneficiaries etc.

So, in summary, indefeasibility does not mean a property dealing cannot be attacked, but it is evidence of the current legal ownership of property.

Discuss at https://www.phttps://www.propertychat.com.au/community/threads/legal-tip-223-indefeasibility-and-the-torrens-system.40248/ ropertychat.com.au/community/threads/legal-tip-223-indefeasibility-and-the-torrens-system.40248/

5 Different ways to Fund Retirement

Retirement can be funded from 5 basic classes of income/assets, which are:

  1. Income
  2. Capital gains
  3. Capital
  4. Borrowing
  5. Government pension

Income is the obvious one. You invest in shares or property and receive dividends or rents. You could also work if you had to.

Capital gains is also relatively obvious, but often not considered by the ‘never sell’ type.

Capital gains are often better than income because they are taxed at half the rate of income (using the 50% CGT discount). Capital gains can be obtained by selling longer term held assets such as shares or property.

Capital, or Corpus, is not usually considered directly, but many financial planners and government websites assume you will eat into your assets so that on the day you die you will have $1 in the bank. This is similar to capital gains, but different because you are eating into the original cash you have contributed to the investment there is no tax payable.

This could be cash in offset accounts – which can be a great way to fund retirement as where the offset is attached to an investment loan the increased interest will be tax deductible.

It could also be from the proceeds of shares of property after they are sold.

Borrowing is still possible, but it will be very unlikely most people will be able to utilise this in their retirement. One way to possibly do it is to borrow as much as possible just before retirement and to slowly use these funds. Another way is the reverse mortgage products.

One method rarely considered though is borrowing from children to fund your retirement. This can benefit both parent and child because instead of selling that property and losing future growth, paying extra tax etc, the child could lend you some money on the expectation of inheriting the property at a later date.

The pension is the backup strategy for many– government will fund your retirement if all else fails. Some can also get a part pension combined with part from one or more of the other classes above.

Note that I didn’t include superannuation as a separate category above, as income from super wil be in one of the above forms anyway.

Discuss at

https://www.propertychat.com.au/community/threads/5-different-strategies-to-fund-retirement.39972/

Debt Recycling v Borrowing Extra to Invest

Strictly speaking borrowing to invest is a different strategy to debt recycling.

Borrowing to invest could incorporate debt recycling, but it is really about borrowing extra money to invest over and above what you have already borrowed.

Debt recycling, on the other hand, is about converting existing non-deductible debt into deductible debt. It doesn’t involve any additional borrowings.

Example

Bart has a home worth $1mil and an owner-occupied debt of $400,000. Bart borrows an extra $200,000 to invest in income producing shares.

Loan A           $400,000           Non-deductible

Changes to

Loan A $400,000      Non-deductible = still the same

Loan B $200,000           Deductible

$600,000 total Debt

Lisa on the other hand wants to debt recycle and she has a home worth $1mil with a loan of $400,000 which is non-deductible. She also has $150,000 in the offset account and wants to invest in shares.

Loan A $400,000      Non-deductible      with $150,000 in attached offset

Changes to

Loan A $300,000      Non-deductible with $50,000 in attached offset

Loan B $100,0000           deductible when drawn down to buy shares

$400,000 total Debt

Of course, borrowing to invest and debt recycling can be combined, and this is what Maggie does. She has a $1mil main residence with $400,000 owing on it and $150,000 in an offset account. She also wants to buy shares but wants $200,000 worth

Loan A $400,000      Non-deductible      with $150,000 in attached offset

Changes to

Loan A $300,000      Non-deductible with $50,000 in attached offset

Loan B $100,0000           deductible when drawn down to buy shares

Loan C $100,0000

$500,000 in total debt

Maggie has used $100,000 to debt recycle as well as borrowing another $100,000 on top for further investments. She could potentially even combine loans B and C above.

Discuss at

https://www.propertychat.com.au/community/threads/tax-tip-219-debt-recycling-v-borrowing-extra-to-invest.39792/

Strategy of Borrowing from a Testamentary Trust instead of Winding it Up

Testamentary Discretionary Trusts (TDT) are the best sort of trust out there, but someone has to die for them to come into existence. So, they are relatively rare. Also, the capital of the trust has to come from the deceased for the extra tax benefits to work (excepted trust income).

So, I cringe when clients approach me wanting to wind up a TDT that their parent has left them in control of.

Their idea usually goes something like this. I have a $1mil loan on my main residence and the trust holds $1mil worth of assets. If I wind up the trust, I can pay off my home loan and save interest.

It is a valid point, but once a TDT is closed it can’t be reopened again, and even if kept open new capital can be injected, but income generated from it would not qualify as except trust income and would not get the concessional tax treatment in the hands of children.

There is a simple way around this though, and that is to get the trustee to make you an interest free loan.

Example

Bart’s dad Homer dies and leaves $1mil to a trustee of a TDT set up under his will. Bart has a $1mil home loan so winds up the trust and pays off the loan.

Lisa is in the same position, but she controls a separate, but identical trust. Lisa gets the trustee to lend her $1mil interest free which she uses to pay off her loan. She has not no deductible debt now. So, she uses the $3,000 she was paying the bank each month to pay back the trust.

The trust now has money with which to invest. The income from these investments can go to Lisa’s children tax free – because they can each earn $20,000 pa tax free so it will be ages before the trust’s income is more than this.

Meanwhile Bart is making the same investments as Lisa, but he receives the income himself and is taxed at 47%

Over the next 15 years or so Lisa would have probably repaid the full $1mil back to the trust so it is now generating about $40,000 per year in income which comes out tax free to her kids.

Once the kids start working, she will have to reassess where the income goes, but until then there are huge savings.

Tip – Don’t wind up a testamentary trust without careful consideration and legal advice.

Note that this would also give great asset protection as well.

Discussion at:

https://www.propertychat.com.au/community/threads/legal-tip-115-strategy-of-borrowing-from-a-testamentary-trust-instead-of-winding-it-up.39662/

Loan Tip: Not everyone needs an Offset Account

Offset accounts are great and most people should have at least one offset account, but there are situations where an offset account is not necessary.

Three situations I can think of are

  1. Someone with low cash savings, and unlikely to have cash savings
  2. Where the interest rates are higher on offset loans
  3. Where there are large annual fees

Example

Example

Loan product with an offset account is 3.8% and without an offset account is 3.4%

Interest on $100,000 at 3.8% = $3,800
interest on $100,000 at 3.4% = $3,400

The question is at what point does 3.8% rate equal $3,400 and working backwards this seems to be $89,474. so this means $10,526 in an offset or more could result in savings

Therefore,
interest on $100,000 at 3.8% with $10,526 in an offset = $3,400
Interest on $100,000 at 3.4% with no offset =$3,400

So this means unless the borrower has $10,526 in the offset, or more, they would be better off without an offset account.

Also offset loans often have a $395 annual fee. So that might mean about $20,000 is needed to be ahead.

Another situation where an offset may not be needed is where a person intends to smash the loan down and has no intention of investing. But in these cases I would probably suggest an offset account because circumstances change unpredictably.

Discuss at

https://www.propertychat.com.au/community/threads/loan-tip-not-everyone-needs-an-offset-account.39612/

Claiming Interest after Sale of Asset at a Loss

Some investors end up selling a property or shares at a loss. They may have borrowed to acquire the property or shares but the sale proceeds may not be enough to pay out the loan – they probably would have used another property as security for at least part of the loan.

In certain circumstances it is possible to keep claiming the interest on the loan in these cases even when there is no income coming in.

Example

Bart bought a property in a mining town for $500,000 and he borrowed $400,000.

The property dropped in value to $300,000 and the bank has let him sell the property but to continue with an unsecured loan of $100,000 (it does happen).

Generally, the interest on Bart’s loan would continue to be deductible as long as he does not try to artificially increase his benefits by extending the loan term, increasing the loan etc. Also, Bart’s case would weaken if he happened to have $100,000 cash in a savings account.

If you are going to be selling at a loss seek tax advice well before hand so you can potentially set yourself up for much more in tax savings which could help you reduce the pain on the loss.

Seek tax advice well in advance of selling – from your tax agent or tax lawyer.

Discuss at

https://www.propertychat.com.au/community/threads/tax-tip-211-claiming-interest-after-sale-of-asset-at-a-loss.39521/

Helping an Elderly Parent Buy a new property

Get some legal advice before trying this.

Some people want to help their elderly parent(s) purchase property. This might be the parents moving to a more suitable property or the parents becoming owners instead of renting.

Helping the parents into a property can also help the children too, because they may potentially inherit the property at a later date and there can be great tax concessional along the way.

There are basically 3 main ways an adult child could help a parent into a property:

a. gift

b. loan – at interest or interest free

c. purchasing part of the property.

There are various estate planning consequences to each of these and also practical consequences.

Some things to consider:

  • if the parents own the home it might be 100% CGT and land tax exempt, if the child owns part it may not be completely exempt.
  • If one child made a gift and they have siblings and the parents die before they gift giver then the other siblings may also benefit from the gift.
  • if it was a gift and you died the next day after making the gift your family would potentially miss out
  • If it was an interest free loan and nothing done for 6 years it could become unenforceable
  • If they have incorporated a testamentary discretionary trust in their will and it the gift all came back to ‘you’ this could provide tax free income to your minor children for years to come.
  • If you gift it and parent A dies first parent B might remarry…

An example of how It could work

Bart and Lisa are adults with one parent left – Homer. Homer lost his house years ago and is renting. Bart and Lisa each have their own homes fully paid off and some cash in the offset accounts to their separately owned investment properties.

Bart finds a property with development potential. It is just around the corner from where Homer lives in his rented flat. Bart is going to purchase the property and is deciding what entity to put it in when he has an idea.

The property purchase price is $500,000. He has enough cash to pay for it so he could just buy it outright, but since his dad is not getting a main residence exemption for CGT Bart talks to Homer, his dad, and they decide to buy it in Homer’s name.

Homer signs the contract and Bart lends him the 10% deposit with a promise to lend him the rest for settlement.

Bart then realises that if Homer dies his sister Lisa will end up with half the property. So to make things fairer he talks to Lisa and gives her 2 options

  1. Lisa put in 50% of the purchase price at settlement, or
  2. Homer leaves the whole property to Bart and Lisa agrees not to challenge this if it happens.

Bart and Lisa decide to ‘go 50/50’ and each lend Homer $250,000 and Homer settles on the property. It is a 5 year interest free loan which they intend to renew each 5 years.

Bart arranges various approvals and the property is now worth $1mil when Homer dies 4 years later.

Under the terms of the will of Homer 50% of his assets would go into each of 2 testamentary discretionary trusts with one controlled by Bart and one controlled by Lisa.

They each now have 50% of an additional property which would be could be sold tax free or held onto with a cost base of $1mil. There has been no land tax along the way because this was Homer’s main residence and they have each gained further tax deductions by using cash in their offset accounts.

Furthermore, any income generated from the property from that point could be streamed to their minor children, as beneficiaries of the trust, with each child getting around $20,000 without having to pay tax.

Just before Homer’s death they also forgave the loans they made him – so this meant that an extra $500,000 was driven into the testamentary discretionary trust so they could generate even more tax free income.

Discuss at:

            Legal Tip 208: Helping an Elderly Parent Buy a new property            https://www.propertychat.com.au/community/threads/legal-tip-208-helping-an-elderly-parent-buy-a-new-property.39377/

Written by Terryw Lawyer at www.structuringlawyers.com.au

Moving out of the Main Residence – When can you claim Interest on loans?

There are 2 major issues when taxpayers want to claim the interest on a loan relating to a former main residence:

  1. Redrawn amounts
  2. Timing

Redrawn amounts and Mixed Loans

Interest is only deductible if the loan it is incurred on was used to purchase the property, or for improvements etc. Where any amounts have ever been redrawn from a loan the interest would need to be apportioned.

Example 1

Tyrell borrowed $500,000 to buy a main residence. Along the way she paid it down to $450,000 and then redrew $50,000 to buy a yacht (which is actually a small boat, but sounds better if he calls it a yatch).

This loan no longer relates solely to the property but is a mixed purpose loan so only 450/500 or 90% of any interest on the loan could be deductible once the property is available for rent.

Example 2

David used a LOC for his loan to purchase his main residence and borrowed $500,000 initially. Every week he deposited his salary and then redrew amounts to live on. The amount of the loan relating to the property will decrease each week and at the end of 5 years the loan would be extremely mixed.

He would have to spend hours to work out the portion of the loan relating to the property and might find that this might only be 10% of the loan amount.

(this is why you should never use a LOC as the main loan, but only to ‘access’ equity)

Timing

The other issue is timing. A person cannot start claiming interest until the property is available for rent. This is generally only after you have moved out and have advertised the property for rent at market rates. While you are living in the property and advertising it the property wouldn’t be available for rent, so you could not claim interest during this period.

There are also timing issues on when interest is incurred and debited to an account because interest is generally incurred daily but added monthly to the loan.

Example 3Let’s say someone moves out on the 30th and immediately advertises the property for rent and on 1st of the following month they are charged $1,000 in interest. Can they claim that interest? No, well not in full because interest is charged in arrears and added to the account monthly. So, 29 days of that interest related to the period you would living in the property. So, in the first month only 1/30th of that $1,000 should be claimed.

Loan Tip: Overcoming Cash out Restrictions When Buying Main Residence

This strategy is simple yet often overlooked.

Strategy: When buying a new main residence borrow 80% to acquire it, whether you need to or not.

Example

Bart has $400,000 cash and wants to buy a new main residence for $500,000. He plans to borrow $100,000 and then later set up a LOC to invest.

He borrows $100,000 and settles on the purchase. Then he asks for a $100,000 LOC and the bank starts asking questions. Eventually, after giving a DNA sample Bart is approved, but they want a statement of advice from a financial planner saying that Bart will invest in shares.

Lisa is in the exact same situation. Lisa gets some credit and tax advice and borrows $400,000 to buy her main residence. At application stage she splits the loan appropriately so that at settlement she can pay down 2 loan splits and is left with one split with $100,000 outstanding.

  • Lisa had no questions asked about future investment plans,
  • Lisa got the lower main residence rates for all of her splits (prob paying 1% less than Bart),
  • Lisa isn’t incurring any extra interest or costs, and won’t until she draws on the splits, and
  • Lisa has split the loans for tax purposes already.
  • Lisa has saved by not needing to pay a financial planner tosatisfy the lender.

In summary, Lisa has overcome the cash out restrictions and gotten a lower interest rate.

Loan Tip: Using Cash as Security for a loan

It is best not to use cash as deposit for an investment property, especially if you will have a main residence loan. Using cash on an investment reduces your deductions and increases your non-deductible interest.

But what do you do if you don’t have a main residence at the moment, but at looking to acquire one soon?

It is possible to use cash as security for a loan. Normally you may not want to or need to do this, but it is possible, and it can assist with maintaining high interest deductions in some situations.

Generally, the security used for a loan does not affect the deductibility of interest. This means anything can be used as security for a loan without effecting the deductibility of interest. The security could be shares, cash or even a car.

The beauty of cash is that it doesn’t need to be valued or sold for the lender to recover its money so the potential LVR on a loan secured by cash is 100%.

Example 1

Tom has $100,000 cash and wants to buy an investment property for $500,000 before he buys his Main Residence. He might be doing this because he has found a ‘bargain’.

Normally Tom would pay a $100,000 deposit and then borrow $400,000 for the $500,000 property. But doing this would mean that going forward Tom would have $100,000 less for the future main residence. He may be able to access it and borrow against the investment property, but this will have some bad tax consequences:

$100,000 x 5% = $5,000 less per year in tax deductions for the next x years (life of the loan).

So instead using the cash as a deposit Tom could use the $100,000 cash as security and borrow $500,000. Ideally this would be done in the form of 2 loans

Loan A $400,000 secured by a $500,000 property. LVR 80%

Loan B $100,000 secured by a $100,000 term deposit. LVR 100%.

Tom could wait for capital growth (from natural market increase and/or a quick reno) and then release the cash, or if Tom quickly buys the new main residence the cash could be released, and the main residence used as security for the investment loan.

This could happen like this:

Loan A $400,000 secured by the IP. interest deductible against the IP

Loan B $100,000 now secured by the main residence. Interest is deductible against theIP

Loan C $400,000 secured by the main residence. Interest not deductible. The $100,000 term deposit is released and used at settlement to pay for $100,000 of the purchase price of the main residence.

Overall 90% LVR.

Example 2

As above. $500,000 property with a $500,000 loan secured by both the property and the cash.

After 2 years the property is now worth $625,000. Tom applies to remove the cash as security and the bank agrees as the LVR is now 80% based on the property value alone.

$100,000 cash is then used as deposit for the main residence. Tom has an extra $5,000 per year in tax deductions for the next 30 years plus.

Example 3

Tom has 2 properties securing 2 loans at ABC Bank.

Tom sells his main residence and will buy a replacement main residence in a few months. The trouble is Tom didn’t realise that his investment property was also secured by the main residence. The investment property is relatively new and hasn’t grown in value so the bank is insisting that $100,000 of the proceeds of the sale of the main residence be used to reduce the loan on the investment property.

Tom refuses and the bank refuses to discharge the mortgage on his main residence so his sale cannot settle.

Luckily there is a solution. Tom lets the bank keep $100,000 from the sale in a term deposit and to use this as security for the investment property (as well as the investment property mortgage itself).

Then when Tom finds his new main residence he will offer this as security for the investment property and the $100,000 will be released.

The 3rd example is probably the more common situation in which the cash as security is used.

There is a cost to doing this – When cash is used as security it will be in the form of a term deposit with an interest rate much lower than what the bank is charging. So, Tom may lose 3% in rate – get charged 5% for the loan, but receive 2% interest for the term deposit. There are tax consequences of this too as this would not be deductible.

But hopefully the use of a term deposit will be brief, and the benefits can last many years to come.

Only authorised deposit taking institutions will allow for cash to be used as security.

Written by Terryw broker at www.loanstructuring.com.au

Discussion at https://www.propertychat.com.au/community/threads/loan-tip-using-cash-as-security-for-a-loan.36038/

Using Redraw to invest

Withdrawing from a loan is considered new borrowings for tax purposes. So the same principles apply as to all loans. It is generally the use the borrowed funds are put to that determines deductibility. The security of the loan does not matter for tax deductibility reasons.

The reason that using redraw is generally a ‘no no’ is that it usually results in a mixed purpose loan. If there are other monies which have been drawn down and used for other things then increasing one loan to buy a property will result in a mixed purpose loan. See my other tip on why not to mix loan purposes.

So unless your loan account balance is $0 it is best not to use redraw but to set up a new split before borrowing.

However where your loan is Interest Only it is possible to use redraw and to later split the loan into the relevant portions. If doing this you should not make any deposits to the loan account other than interest.

Ideally you would split before borrowing but some people buy property at short notice with no planning and in these cases it would be better to use redraw than to use cash to pay the deposit as a mixed loan can be unmixed later – see Tax Tip 44.

The main point is that using redraw will result in a mixed purpose loan – unless the redrawn amount is used for the same purpose as the underlying loan. So avoid redrawing if possible.

Written by Terry Waugh, CTA & lawyer at Structuring Lawyers, www.structuringlawyers.com.au

Parking borrowed money in an offset account

I Thought I would start some tax tips so I don’t have to keep repeat typing the same thing over and over again.

Many people borrow money and deposit that borrowed money into a savings account or an offset account and then later use that money to invest. In these cases, will the interest be deductible?

The answer is “Maybe”!

In relation to investing, under s8-1 ITAA97 an expense is deductible if it is incurred in gaining or producing assessable income. Interest is generally deductible under this section. But problems can arise where the ‘incurring’ is not directly connected with the investing.

In a legal case from 2004 Mrs Domjan borrowed money, and moved it, briefly, from the loan account into a savings account to write a cheque. The savings account contained other money which was not borrowed. So when she wrote the cheque to purchase an item for her investment property it could not be said that Mrs Domjan had used the borrowed money – it could have been the cash in the account.

The connection between the borrowing and investing was broken by the borrowed money taking a detour before investing.

Some have argued that where the savings account is empty then there will be no co-mingling of borrowed and non-borrowed funds if the loan is drawn down into this account. This is true, but where interest is incurred on the borrowed funds it cannot be deducted as there is no income generated. However, where the savings account is an offset account there is no interest incurred at all as the borrowed money is in the offset offsetting the loan. If this borrowed money is later used for investment, then the interest will start to be charged on the loan. My opinion is that this interest can be traced to the investing and the interest should be deductible (assuming no mixing).

However as far as I know there is no legal or ATO authority to say this is correct, except for one private ruling that I have found – see Private Ruling Authorisation Number 57920.

Question 1 of this ruling is the relevant question here. Note that the circumstances to this question differ from our scenario of ‘topping up a loan’ as this situation involves the taxpayer borrowing extra at the purchase, similar but slightly different, to a person accessing equity by further borrowings.

This private ruling cannot be relied upon by anyone other than the person who applied for it – within the dates listed.

So, in summary

  1. Borrowing money to park in a savings account will probably result in the interest being NOT deductible.
  2. Borrowing to park in an offset account may result in the interest being NOT deductible where the offset contains other non-borrowed money. The interest could possibly be deductible in part.
  3. Borrowing to park in an offset account may result in the interest PROBABLY being deductible when the offset funds are used to invest at a later date.

Where an offset account is involved it is very easy to get mixed up or confused with account numbers etc. and to inadvertently deposit non-borrowed money into the account. This is harder to do with a loan account and the effect is less as any deposit can be left there without contaminating the loan. Where borrowed money is in the offset and non-borrowed money is deposited into that account it will be impossible to rectify. It would be like putting a drop of urine into a cup of tea – you can’t take the urine out again. If you think you can, would you drink the tea?

To avoid the risks of ruining deductibility I suggest a better way to proceed would be to use an Interest Only loan where you can draw down the funds at settlement and put them straight back into the loan. The funds can sit there until needed and then be re-borrowed from the loan at the time of investing. Or the funds can stay in the offset, and then go back into the loan a few days before re-borrowing again to invest.

Alternatively use a LOC product. These allow a credit limit with funds capable of being drawn (i.e. borrowed) when needed. The disadvantage with LOCs is the higher interest rate and the fact that these loans are often (but not always) without a fixed term and can be called in by the lender at short notice. However, once the money is actually used the LOC could also be converted to a term IO loan. This way you get the best of both worlds.

And keep in mind:

Even depositing rent in an offset containing nothing but borrowed money will contaminate the loan. If the offset contains the borrowed money only you can trace it back to the borrowings, so the interest will PROBABLY be deductible (see tax tip 1). But as soon as you mix non-borrowed money in an offset containing only borrowed money it will be contaminated and AT BEST you will have to apportion the interest. Doesn’t matter what the source of the money is.

See

Written by Terry Waugh, CTA & lawyer at Structuring Lawyers, www.structuringlawyers.com.au

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