All Topics / Help Needed! / Tax deductibility query for acquisition

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  • Profile photo of propertyboypropertyboy
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    @propertyboy
    Join Date: 2008
    Post Count: 232

    Hi All,

    Below is my situation. Simplified numbers for ease

    1. I purchased a $1m property with $800k debt.

    2. Value has gone up over the years and I have refinanced the debt to $1m (200k top-up)

    3. All the refinance proceeds have been deposited into my offset account as have all my savings. I currently have $800k sitting in my offset account. I have never used the redraw function. That is – $800k in offset account and credit limit sits at $1m

    4. I have rented this property but plan to move back into it as my Principal place of residence soon.

    Question is this:

    If I pay the $800k sitting in my offset into my redraw facility and redraw and use these funds to buy a new property, will I be able to deduct the interest against the rental income for the new property? From the below ATO guidance it would appear so.

    https://www.ato.gov.au/law/view/document?docid=TXR/TR20002/NAT/ATO/00001

    Following on from this, as this property will then be effectively unencumbered, if I subsequently refinance it at say 80% LVR at a later point – will that $640k debt be tax deductible if I use it to buy another investment?

    I may move out of my principal place of residence and set it as an investment property so want to ensure the initial $800k and subsequent $640k can be deductible.

    • This topic was modified 4 months ago by Profile photo of propertyboy propertyboy.
    Profile photo of TerrywTerryw
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    @terryw
    Join Date: 2001
    Post Count: 16,213

    You now have a mixed loan, so a few issues there.

     

    If you pay the loan down by $800k it will be mixing it furhter so you should split it. Pay $800k into a $800k split and redraw it and invest it. If the investment is expected to produce income, such as rent, the interest on this split would generally be deductible.

     

    Deductibility is determined by the use of the money borrowed, not the security. So if you borrow another $640k and invest it the income will be deductible. THe main criterisa is  that it needs to generate income.

     

    Seek specific tax advice.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://structuring.com.au/
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    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://Terryw.com.au/

    Profile photo of propertyboypropertyboy
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    @propertyboy
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    Hi Terry, what do you mean by my loan being mixed?

    If I move back into the property as my principle place of residence and put $800k into a redraw and redraw to buy another property will the interest be deductible against the rent of the new property? I am redrawing (borrowing) to invest in the second property.

     

    Profile photo of TerrywTerryw
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    @terryw
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    The loan relates to 2 or more uses.

     

    Your loan is current $1mil right?

    Part of this relates to the purchase of the current property and part relates to not much, you borrowed and put in an offset mixing with cash.

     

    If you put $800k into a $1mil loan the balance will be $200k, but this balance partially relates to the purchase of the property and partially to the mixing in an offset account.

    It will be mixed furhter if you pull $800k out to invest. You could only claim part of the interest.

    But if you split the loan and paid $800k into an $800k split and redrew to invest the interest could be deductible in full, if you do it right, as there would be no mixing then. 100% of it was used for the 1 investment.

     

    It is not really relevant if you move back in or not.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://structuring.com.au/
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    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://Terryw.com.au/

    Profile photo of TerrywTerryw
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    @terryw
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    Actually you are probably best to work out hte portions of the mixed loan now, then split, and then do the above as this might help you claim the interest on the $200k if you were to rent the current property out.

     

    Seel specific tax advice

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://structuring.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://Terryw.com.au/

    Profile photo of propertyboypropertyboy
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    @propertyboy
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    The loan limit is $1m (800k relates to the first purchase and 200k top-up).

    800k cash sits in the offset ($200k of this was from the top-up that was never spent – just sitting in offset)

    If I take the 800k and put in the redraw then take it out to buy a new property, will the full 800k be deductible?

    • This reply was modified 4 months ago by Profile photo of propertyboy propertyboy.
    Profile photo of TerrywTerryw
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    @terryw
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    If I take the 800k and put in the redraw then take it out to buy a new property, will the full 800k be deductible?

     

    =

    No

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://structuring.com.au/
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    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://Terryw.com.au/

    Profile photo of propertyboypropertyboy
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    @propertyboy
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    So if I move back into the property and it becomes my principle place of residence and put 800k into the redraw then redraw to buy a new property for $1m (80% LVR). Are you saying none of the interest is deductible against the rent of the new property? The ATO tax guidance appears to outline it will be. How much will be tax deductible?

    • This reply was modified 3 months, 3 weeks ago by Profile photo of propertyboy propertyboy.
    Profile photo of TerrywTerryw
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    @terryw
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    So if I move back into the property and it becomes my principle place of residence and put 800k into the redraw then redraw to buy a new property for $1m (80% LVR). Are you saying none of the interest is deductible against the rent of the new property? The ATO tax guidance appears to outline it will be. How much will be tax deductible?

    Not sure how you get that idea from my posts. If you split the loan and do it properly 100% of the interest could be deductible if the borrowed money is used to buy an income producing property as per s8-1 itaa97

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://structuring.com.au/
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    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://Terryw.com.au/

    Profile photo of BennyBenny
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    @benny
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    Hi Terry,

    >>> Not sure how you get that idea from my posts.

    Maybe this one confused somewhat?  Worked for me….  :p

    If I take the 800k and put in the redraw then take it out to buy a new property, will the full 800k be deductible?

    =  No

    Profile photo of TerrywTerryw
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    @terryw
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    If iti s a $1mil loan then the interest will not be deducitble in full. 80% would potentially be the max

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://structuring.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://Terryw.com.au/

    Profile photo of propertyboypropertyboy
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    @propertyboy
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    I interpret the 800k would be deductible if put in redraw then drawn out for purpose of buying another income producing asset

    What does splitting the loan mean? It is one limit.

    Thanks

    • This reply was modified 3 months, 3 weeks ago by Profile photo of propertyboy propertyboy.
    • This reply was modified 3 months, 3 weeks ago by Profile photo of propertyboy propertyboy.
    Profile photo of TerrywTerryw
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    @terryw
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    I am a tax lawyer with a credit licence. with lots of experience in this area. You will need to apportion the interest if you do not split, furthermore, you will be paying back deductible debt with every deposit into the loan.

    Splitting a loan means making one loan into 2 (or more).

    • This reply was modified 3 months, 3 weeks ago by Profile photo of Benny Benny. Reason: Editing as per Terry's correction - for clarity

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://structuring.com.au/
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    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://Terryw.com.au/

    Profile photo of propertyboypropertyboy
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    @propertyboy
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    How do I split? Is it a new credit approval request or is it easy to have a bank put two limits?

    Profile photo of TerrywTerryw
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    @terryw
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    You just ask the lender. Generally no new application needed

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://structuring.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://Terryw.com.au/

    Profile photo of propertyboypropertyboy
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    @propertyboy
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    Thanks Terry.

    So I pay $800k into redraw. Then call CBA and ask them to split it based on required amounts then pull out the 800k?

     

    So will have two limits – 1 limit for $800k and the other for $200k?

    • This reply was modified 3 months, 1 week ago by Profile photo of propertyboy propertyboy.
    Profile photo of TerrywTerryw
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    @terryw
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    I would split it first then pay $799,900 into the loan and redraw. Otherwise it might automatically close.

    You would have 2 loan splits.

     

    Also watch out with CBA as there are a few quirks. Confirm with them that you have redraw and can immediately redraw the full amount.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://structuring.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://Terryw.com.au/

    Profile photo of propertyboypropertyboy
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    @propertyboy
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    Post Count: 232

    Great – thanks very helpful.

     

    Profile photo of propertyboypropertyboy
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    @propertyboy
    Join Date: 2008
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    Phone assistance outlined best to go into the branch. Apply for the split in the branch.

    Anyone had issues with bank’s withholding redraw requests? They have outlined on the phone it is not subject to credit approval.

    However, is there a risk the redraw may not be released?

    Profile photo of TerrywTerryw
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    @terryw
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    What I have seen happen with CBA is that someone might put in some money into the loan today and then think they can redraw it immediately or the next day, but they have to wait for the next monthly payment to come out first. I don’t have any CBA loans atm, so have not experienced this, others have not had any issues.

    So after you split the loan I would ask them if I paid say $200,000 into the loan today, could I redraw $200,000 tomorrow?

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://structuring.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://Terryw.com.au/

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