Hi Everyone, Just something i have been thinking about. If you have a IP say worth 400k and equity of 300k (owe 100k), if you were to refinance that loan to 80% that would give you a buffer of 220k. Now if you have your PPOR with an offset account, and park the 220k funds in there and you 'INTEND' to use that 220k for investing purposes, then the whole 80% loan on the IP would be tax detuctable, yay or nay????? I know for a fact that if you buy a block of land and intend to build an IP on that block, the loan on the land is tax detuctable straight away. Im pretty sure it is all about the INTENTION of the funds. Has anyone come across this situation? Cheers House
Actually - you may run into problems with that approach. At the end of the day, it is all about what you really do with the money - and your suggestion is to gain a personal benefit (reduction in PPOR interest costs) from funds that you argue are for investment purposes. Regardless of what you do with that money in the future - I'd think the ATO would treat that as personal borrowings and as such, the IP loan would no longer be fully deductible. The general rule is to never mix funds for personal or investment use - and I would extend that to include not placing borrowed "investment" money in an account which sees you get a "personal" (ie non-investment) benefit. You may find an accountant or tax advisor willing to work with the concept if there was a clear paper trail and no other money was ever deposited into that account (if personal money already exists in that offset account - I'd say there is no chance at all of getting away with it).
While in the offset account your net borrowing remains $100k ???? No deductions for expenses you do not incur. Cheers, Rob
I know what your thinking Rob and it doesn't work as its not tax deductible. Trust me (and sim) it's not In addition the very nature of how an offset account works and the structure that you would need to create would eliminate any benefits from creating artifical (& illegal) tax deductions.
I've been discussing this in some detail with an accountant over the last couple of days and while I'm no expert (usual disclaimers, blah blah), here's my take in layman-speak. As others have alluded, it's the purpose to which you put the loan that is the key, not the source of the loan. By putting the equity into a personal offset account you've immediately contaminated the purpose of the loan and you'll run into a horrible paper trail to keep track of which portion of the loan is used for investment (ie, deductible) and which is personal (non-deductible); the fact that the money was originally secured from your own IP is irrelevant. What would work, according to the accountant, is that you withdraw the equity in the IP and park it in an offset account linked to the IP loan and completely distinct from your PPoR loan. That way, you at least have the funds available when you want them without increasing your IP payments up until the time you start pulling that equity out of the offset account (unless that is what you want, of course). The funds in the offset account can only be used for investment purposes naturally, and not for personal use, otherwise you again contaminate it with a non-investment purpose.
TR 93/6 item 17. Allows you a deduction on the $100k - being the net borrowing for your original IP. Borrowed $320k. The $220k does not produce assessable income, it merely offsets any interest liabilities in the loan account. Leaving $100k net borrowing on which interest is deductible as it can be traced to the IP acquisition. You cannot deduct expenses you did not incur. You did not incur interest expense on the extra $220k withdrawn whilst it was deposited in the offset account. Cheers, Rob
