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Keeping PPOR and Investment Loan Separate ?

Discussion in 'Accounting, Tax & Legal' started by TryHard, 23rd Nov, 2005.

  1. TryHard

    TryHard Well-Known Member

    17th Aug, 2005

    I kind of recall in a presentation by Nick that's it important not to cloud the source and purpose of borrowings. Something about making sure that proceeds from an IP don't get lumped in with a 'bulk' line of credit which might mean the payments-in-advance could not then be validly claimed as deductions if later used for investment (as usual my tiny brain only soaked up the general gist but not the essential detail!)

    Our HDT has some money sitting in cash reserves. The intention is to buy some more NI units in a month or so.

    We don't have an offset account of any sort.

    So my question is, if I identify the money clearly and temporarily put it as an additional payment on our PPOR loan (to save some interest) and later withdraw it (again with a clear paper trail) is that ok to claim an interest deduction for the NI units I'm gonna purchase with it ? Or is that the sort of muddy-water situation its best to avoid ?

    Maybe someone else has done similar to park investment funds wisely while waiting to invest ?

    Thanks in advance
  2. Simon Hampel

    Simon Hampel Co-founder Staff Member

    9th Jun, 2005
    Sydney, Australia
    So if I understand you ...

    1. You have cash ready to invest.

    2. You were planning to put that money into your PPOR loan account for a while until you are ready to use it.

    3. You were hoping to be able to redraw that money and then claim the interest charges for that money.

    ... now that's all fine, and indeed with some careful planning you could achieve this. However, can I suggest that you do not go down this path ... you are indeed in a muddy-water situation. The number one issue isn't tracking the original loan for investment as such ... it's tracking what happens later - when you are making payments off the PPOR loan.

    If it's one big loan without any clear separation between the investment and personal components, there is no way of determining which part of the loan is being "paid off" through a repayment. The "repayment" I mention here could be either a principal payment as part of a P&I loan, or even just a future deposit of spare funds temporarily - it's still regarded as a principal repayment, and you have no way of differentiating between the personal and investment components. You will typically lose out in the whole process, because the ATO is likely to determine that you make the payment against the investment part of the loan first (regardless of what your intention was) and therefore you will lose some of the tax benefits.

    All up, it's simply too messy.

    It might be worth asking your lender if it is possible to split off part of the loan into a separate loan account (eg. split a $200K loan into a $175K loan and a $25K loan). This way you can have a much larger degree of separation. This split might not be possible one the loan is set up though ... might have had to be done at loan setup ... you'd need to ask the lender.

    I wouldn't get too stressed about the whole thing ... not paying interest is actually better than getting a deduction by paying some. It's the old spending $1 to get 48.5c back ... doesn't make much sense.

    My suggestion ... in the short term, set up an ING Direct account ... 5.4% interest earned - at least it's doing something. Secondly, use the cash to margin into the NI fund - it'll make you more money overall since the cash component of the investment wasn't borrowed.

    Alternatively - consider just paying down your PPOR loan with that cash ? Once the loan gets to zero, it's easy to draw it all back out again as deductible.

    Third alternative - when it's time to revalue your PPOR, go to the bank and ask for a "top up loan" ... keep the existing loan exactly as it is, but get a second loan facility set up for the additional equity drawing - and use that loan for investment - it's completely separate from your original PPOR loan, so should be fine.
  3. Simon

    Simon Well-Known Member

    17th Sep, 2005
    Or keep the funds in offset where they will not affect the original loan purpose.
  4. TryHard

    TryHard Well-Known Member

    17th Aug, 2005

    Thanks Sim - makes sense. I won't even try to clarify the number of sub-accounts involved and how this money happened to end up in here :) - but your advice helps a load. Cheers, Carl