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LOC Repayments

Discussion in 'Accounting, Tax & Legal' started by Vagon, 9th Apr, 2010.

  1. Vagon

    Vagon Well-Known Member

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    Hi guys, I had this over in money management, but on reflection its probably better here.

    My situation is I have a LOC that hasn't been maxed out. My intention is to not make the repayments for the LOC and instead put the equivilant amount into my PPOR's offset.

    Is this considered a legitimate strategy or will there be reprocussions down the track?

    Any help or a direction to any resource is greatly appreciated.

    Cheers
     
  2. Billv

    Billv Getting there

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    When you say you won't make any replayments, will you be paying interest only or nothing at all?

    Is the LOC from an investment property?
     
  3. Vagon

    Vagon Well-Known Member

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    Hi Bill, thanks for your help.

    Ideally I was hoping to not pay anything at all, but I have this nagging feeling thats not going to work.

    FYI the LOC is for investing in shares.
     
  4. Billv

    Billv Getting there

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    So if I understand you correctly you want the monthly interest to be taken from the LOC so the LOC balance reduces and the dividends to go into your PPOR offset?

    I'm not an accountant but I believe it's allowed.
     
  5. Vagon

    Vagon Well-Known Member

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    Sorry its probably my wording that's confusing, I'm not considering dividends, purely loan repayments. For clarity's sake I'll provide an example:

    PPOR loan of $1000 with an offset of $100
    LOC of $100

    Interest on both = 10% p.a. charged yearly.

    After one year the situation without any repayments should look like:

    PPOR loan of $1100 with an offset of $100
    LOC of $110

    Now what I'd like to do is use my salary to pay the $10 off my debts. It seems ideal that I do not pay what's owing on the LOC, but put it into the offset:

    PPOR loan of $1100 with an offset of $110
    LOC of $110

    Instead of reducing the LOC:

    PPOR loan of $1100 with an offset of $100
    LOC of $100

    So up the LOC interest (tax deductable) while essentially offsetting the PPOR interest (not tax deductable) by the same amount.

    I hope this hasn't completely confused you!

    Cheers
     
  6. Billv

    Billv Getting there

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    Good try at the end of the day. :)

    Don't worry, I know what you mean.
    Although in real life the PPOR loan does not change
    It stays 1000 and your lender deducts the monthly PPOR interest
    from the offset account.

    It's fine to direct your own money into your offset account weekly or monthly as you get paid.
    This is the what you're supposed to do with an offset account.
     
  7. Vagon

    Vagon Well-Known Member

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    Yeah exactly I'm paying off the interest there with my salary.

    My main concern is actually with the LOC repayments though, because that has tax implications.

    So to go back to my example, say I spend $110 a year on interest my ideal situation would be after one year:

    PPOR loan of $1000 with an offset of $110
    LOC of $110

    But I wasn't sure if I had an obligation to pay off the LOC if I have the money to put into the offset.
     
  8. Rob G.

    Rob G. Well-Known Member

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    There is no obligation to put investment income into your loan, but you have increased your borrowing.

    Whether interest on this "new borrowing" is tax deductible requires you to apply ordinary principles of testing the original purpose and actual use of those funds.

    There has not been a clear court case on precisely where the boundary lies here, but promoters & investment advisors of course interpret this very liberally.

    Cheers,

    Rob
     
  9. Vagon

    Vagon Well-Known Member

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    Thanks a lot Rob that makes good sense.