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Or is it six of one half a dozen of the other?

Discussion in 'Accounting, Tax & Legal' started by MJK, 1st May, 2008.

  1. MJK

    MJK Well-Known Member

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    I have a loan for 501K with a redraw facility. This loan also has a offset account linked.
    I have just paid the loan down by 500k to 1k.
    From a taxation perspective (rather than a concern about future availability of funds) would it be better to;

    1. Redraw the 500k into the offset and then as investments (say 100k at a time)are bought the portion of used funds become tax deductable (interest that is)

    2. Redraw 100k amounts from the loan as required at time of purchase of an investment.

    Or is it six of one half a dozen of the other?

    MJK
     
  2. DaveA

    DaveA Well-Known Member

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    as long as ur not using the offset account for any other uses, then its 6 of one, half of the other....

    if you put your pay into the offset, then the redrawn amount comes as a mixed loan and hence option 2 would be prefered....
     
  3. tailcat

    tailcat Well-Known Member

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    MJK,

    What was the original purpose of the 501K loan? Is it a mortgage for your PPOR? If so, I would talk to your bank about paying out the last 1K (down to $1 if necessary) without closing the account so that it then becomes totally a tax deductible loan. Having 1K of non deductible money in 500K will just annoy your accountant!!!!!

    Could someone, more tax au fait, confirm whether paying down to $1 is accepted by the ATO.

    Tailcat
     
  4. MJK

    MJK Well-Known Member

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    Pays go to a different account (not linked). So business use is the sole purpose of anything to do with this accounts future.

    MJK
     
  5. MJK

    MJK Well-Known Member

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    I agree with you statement but must admit I am fearful of the loan being closed if I pay down as low as $1. It is an interest only loan so automatic repayments shouldn't accidently close it out. I may pay it down to say $100 and lower my interest clain to the ATO by $10pa on my return adfinitum.

    MJK:D
     
  6. handyandy

    handyandy Well-Known Member

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    To be sure that the loan is not closed down, particularly in this environment of tightening credit I would put the whole amount into the offset account. (Based on the assumption that this is 100% offset)

    Accounting wise its no different then having the loan paid off as no interest is payable.

    Cheers
     
  7. MJK

    MJK Well-Known Member

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    From that perspective I'm inclined to agree with you.

    MJK:D
     
  8. tailcat

    tailcat Well-Known Member

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    MJK,

    You still have not confirmed if this a mortgage against your PPOR or not.

    Tailcat
     
  9. MJK

    MJK Well-Known Member

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    Tailcat,

    Yes it was PPOR. Now a business account. I paid it down yesterday and redrew into 100% offset today.

    MJK
     
  10. Rod_WA

    Rod_WA Well-Known Member

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    If you buy an investment with the redraw funds (now in offset) and the interest accrues in the loan, then can you claim the interest in the loan?

    If you withdrew from the loan directly for investments, then it's clear. But if you sit the funds in the offset until you deploy them for investment, then how can you say that the loan interest is deductible? Is there a 1:1 connection between the accounts?

    For example, you move $500k into the offset on 2 May 2008. Then you buy $100k ETF on 23 August from the offset. Where's the connection?

    If (i) the loan account did not have a redraw facility and the only access to the funds was through the offset account, and (ii) the only purpose is for income-producing investment, then the transaction trail is reasonably clear.

    But if the loan has redraw and the loan funds happen to reside in the offset account, then you would have to argue that the interest in the loan funds is 100% attributable to the investments bought with the offset cash.

    I reckon the direct redraw is six, and the offset account is slightly less than half a baker's dozen.

    Why not just leave the cash in the loan account? Is it because the loan has fixed direct debit repayments, rather than IO like a LOC? These days redraws can be free. Sure, keep the offset account, it will probably be useful for managing dividends or something (if you have erased any personal-use debt).

    Maybe I'm being over cautious.
     
  11. MJK

    MJK Well-Known Member

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    In sure wish an accountant would give their opinion as Rod raises a point I have not given full consideration and admit I'm unsure of the answer.
    I assumed that with the money in the offset, interest will not be charged as it is offset 100%. Then when an investment is purchased interest will begin to be charged as a direct result of the purchase making it a cost of doing business.

    MJK
     
    Last edited by a moderator: 4th May, 2008
  12. Rob G.

    Rob G. Well-Known Member

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    Borrow $500k, purchase $100k income producing investments and park the rest in a 100% offset account LINKED TO THAT LOAN.

    Net borrowing $100k fully deductible - you cannot claim for expenses you do not incur.

    BUT ... if you parked the surplus $400k in an offset account linked to a private loan then you might have a mixed purpose loan.

    Who knows what mischief that will wreak - e.g. will paying the surplus $400k back into the original loan be deemed to leave only $20k interest-deductibe borrowings and $80k private borrowings.

    TR 2000/2 does not go as far as this transaction, but it is not much of an inference for the Commissioner to make - which means he may just use you as the test case guinea pig.

    Why court expensive disaster with exotic transactions when there are fairly clear Tax Rulings that will allow straightforward financing transactions without any doubts ?

    Cheers,

    Rob
     
  13. handyandy

    handyandy Well-Known Member

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    Good point raised by Rod.

    So with the offset account and utilizing the funds for investing.

    The concept needs to be that prior to using the funds the funds are transferred to the actual loan account and the investment money is then drawn from the loan account giving a clear path and thus allowing subsequent tax deductions of interest.

    Cheers
     
  14. MJK

    MJK Well-Known Member

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    This has never been the case. Re my initial post the original loan was for a PPOR. It was then paid down to $100 after which the funds available were redrawn into a DEDICATED offset account (which had never had any personal use going through it as it is a brand new offset facility. The offset account is directly linked to the loan in question and no other). This offset account and the total redraw funds will be used only for business use. There will be no mixed use at all.

    Surely this represents a clear arrangement???:confused:

    MJK
     
  15. MJK

    MJK Well-Known Member

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    Because many on somersoft have argued that banks have the potential to cancel redraw facilities therefore it is deemed a safer haven for your equity to be drawn down into offset.

    The loan is IO.

    MJK
     
    Last edited by a moderator: 5th May, 2008
  16. Rob G.

    Rob G. Well-Known Member

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    Experience has shown me that I should never assume anything about even the most simple post. They have a habit of subsequently unravelling more issues that have a material impact on the decision.

    The downside of the offset approach is even more accounts to be very careful to quarantine.

    The upside is you can perhaps lock into favourable rates based on a long-term fixed borrowing.

    Even better ... if you have locked in a fixed borrowing and you sell down your investments at a loss, you can still claim deductions long after your income-producing activities have ceased. Contrast this to a LOC which is regarded for tax purposes as a monthly refinance !!!

    Cheers,

    Rob
     
  17. Rod_WA

    Rod_WA Well-Known Member

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    Rob and others, could you offer your thoughts on this.

    This is not my situation, but a post in another thread plus your comments above got me thinking.

    If you have an investment and pre-pay the interest to minimise current financial year tax liability, then soon after that sell the investment...

    Consider:

    1. Prepay interest on a $100k loan, say $9150 interest (9.15%) on 30 June 2008 (capitalise the interest onto the investment loan, so balance is $109,150).

    2. Claim tax deduction on $9150 advance interest.

    3. Sell investment in July for $100k, and park proceeds in offset against PPOR.

    4. Save around $8500 in PPOR interest (8.5%) and achieve accelerated PPOR loan reduction.

    5. Park the tax refund in the PPOR offset also, $3800 at 41.5% MTR, saving an additional $200 in PPOR interest (assume tax refund available for 7 months of the fin. year).

    6. Pay back loan at the end of the prepaid interest period (assume 12 months), by taking $109,150 out of the PPOR offset.

    At the end of this, the gain is $3000 or 3% after tax.
    Further, any CGT liability is pushed out to the next financial year.

    Obviously there would need to be some justifiable reason for selling the investment. But if there was a valid reason, would the ATO allow this tax benefit?
     
  18. Rob G.

    Rob G. Well-Known Member

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    TR 2000/2

    The Commissioner generally regards a sell-down of your investments as a recoupment. Therefore merely keeping the borrowing on hand out of convenience or for another purpose may change deductibility.

    However, if you had originally locked into a contract and the proceeds were insufficient to pay it out, the residual could be deductible after the income producing exercise has ceased. e.g. Browne's case. This does not sound like your facts !!!

    Any time a loan is refinanced, the purpose is reviewed. This is particularly a problem with a LOC which is regarded as a monthly revolving finance !!!

    Don't forget Fletcher's Case and subjective purpose where it does not make commercial sense.

    Cheers,

    Rob