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Redraw and Tax

Discussion in 'Real Estate' started by GLENN, 6th Jan, 2011.

  1. GLENN

    GLENN New Member

    Joined:
    6th Jan, 2011
    Posts:
    1
    Location:
    brisbane
    Hi there,

    My Wife and I have had our home loan with a redraw feature for 2yrs now. It is our first home and is a townhouse. We are now thinking that within another 7 more years we would upgrade to a house and are thinking it may be a good opportunity to keep the town house as an investment property.

    should we be thinking now of refinancing to a home loan with an offset account rather than paying extra into redraw. Can somebody please explain the tax disadvantage of redraw to me.

    if we had 50K available in redraw in 7yrs time and changed the townhouse from PPOR to IP when and how much would the tax man claim? how would this be paid?

    is there a disadvantage to our current situation whereby we put our savings into redraw and access these funds to go on holidays, new car etc.

    Is it worth considering to plan on selling the townhouse to upgrade in 7yrs?

    Similarly is it worth considering to work harder to repay and eventually own the townhouse and then look at starting again with a home loan on an house upgrade?

    Do either of the above 2 options change which type of loan i should use - Offset Vs Redraw.

    GLENN
     
  2. Rod_WA

    Rod_WA Well-Known Member

    Joined:
    18th May, 2007
    Posts:
    324
    Location:
    Inglewood, WA
    Hi Glenn

    Good question, and yes, the redraw should be replaced with a 100% offset.

    The interest payable on the loan is reduced by exactly the same amount whilst you are living in the home, but the tax advantage will kick in when you move the property to an IP.

    After a few years, say you have paid an extra $50k off the loan (in addition to regular principal + interest payments). If that $50k is in the offset account, you can spend it on whatever you like (or maybe you already have!!) and not affect the future tax deductibility of the loan balance. If the $50k is used from redraw, then the reduced balance is all you can claim upon.

    Redraw: Loan amount (say) $300k (the 'limit' that you can draw to, which reduces over time with a P+I loan) with a $50k redraw ('buffer') built up; you take out $50k for personal spending and you have $250k balance that can be turned into a $250k deductible loan.
    Offset: Loan amount $300k but with $50k in offset; you spend the $50k and the loan is still $300k which can be turned into a $300k deductible loan.

    Obviously the tax deduction for interest on an IP loan will then be different... say you're on a 31.5% marginal rate with loan rate 7%, then the difference in tax refund due each year will be $50k * 0.315 * 7% = $1100 (better in your hand that the ATO's!!)

    One of the traps to watch for... some people are more prone to spend the cash in the offset savings account, than the money 'working' in the redraw loan account. You have to treat the offset carefully as well - hold onto it as if it were 'locked away' in the home loan.

    Make this change as early as possible, as the loan amount which you can turn into a deductible amount will be based on the minimum loan balance you held whilst the loan was for your PPOR, and if you're taking the redraw out in chunks then this gets messy.

    Cheers
    - Rod
     
  3. ialienam

    ialienam New Member

    Joined:
    29th Jan, 2009
    Posts:
    2
    Location:
    sydney
    Hi I am a newbie here.. I am in a similar situation here.

    However, I have a loan $400k (O/O) for Property A, no offset only redraw facility. Say I now have $100k in redraw and if I use that money to purchase my next house for own living and turn Property A into an IP. I understand that I can only claim the interest on $300k bit.

    SO some people have suggested that I do a refinance to "clean" it up!?
    Say refinance $400k with a different lender and with an offset a/c, dump that $100k into the offset and use that to purchase a bigger house for O/O. Make Property A as an IP and will be able to claim the interest on $400k.

    However, after went through a few other threads, it's NOT legal??!
    Something to do with ATO TR 2004??
    Seems once I take out the loan, the ATO will assess the loan as at the minimal balance or something??

    I just been getting mixed response, and wondering if there is like one ATO page clarifies some issue? or maybe a very well-specalised tax agent I can talk to (in Syd)

    Thanks!
     
  4. Terryw

    Terryw Well-Known Member

    Joined:
    9th Jun, 2006
    Posts:
    653
    Location:
    Sydney
    Taking money from a loan, even a redraw = new borrowings.

    The interest on the new borrowings will only be deductible if used for investment/business expenses.
     
  5. Billv

    Billv Getting there

    Joined:
    15th Jul, 2007
    Posts:
    1,796
    Location:
    Sydney, NSW
    Good point there Terry, often people believe that redrawing money and maxing out the loan before they move out is enough to make the interest on the loan balance tax deductible when this isn't the case.

    A redraw is treated by the ATO as new borrowings and the interest on the new amount will only become tax deductible if you use those funds for an income producing activity.
     
  6. Bumbl3

    Bumbl3 New Member

    Joined:
    25th Jan, 2012
    Posts:
    1
    Location:
    Sydney
    I am in exactly the same situation also and would love to get some advice. I current live in a flat and am looking to move into a house and turning the flat into an investment.
    Current PPOR have $300K left
    Have made repayments of $150K in total inc 50K additional payments into the loan.
    I am looking to refinance to get an extra $200K making the total borrowing $500K and putting the $200K into the new house which will be PPOR.
    Will the extra $200K refinance be tax deductible on the investment?
    If I take the $70k redraw out and use it as downpayment for another IP, will it then be tax deductible?

    Thanks
     
  7. Terryw

    Terryw Well-Known Member

    Joined:
    9th Jun, 2006
    Posts:
    653
    Location:
    Sydney
    Look at the use of the funds to determine deductibility.

    The $200,000 extra borrowed would be a private expense if they are used to buy a PPOR.

    If you take $70k out of redraw this will be new borrowings. If you use it as deposit on an investment property it would generally be deductible.