Home Loan Redraw Contamination - What Are My Options?

keyman on 08/01/2020 - 15:46

We originally had a 350k PPOR home loan with Bankwest. It was just a basic home loan with no offset account, just redraw. About 2 years ago, we refinanced to a 450k loan with UBank to take advantage of the lower interest rates and so far they have been great due to passing on all the rate cuts. We have been treating the redraw accounts as regular savings account. All our salary was going into it and we would redraw regularly to pay off our spending.

Come now, we are in a pretty good place financially and are looking at upgrading to a bigger house and turning our current PPOR into an IP but have discovered that we have cocked up majorly and have ruined ourselves in terms of taxation. We only just learnt now that the loan is "contaminated" with deductible money and non-tax deductible money. Unfortunately, we naively jumped into the property game without understanding all the intricacies of home loan products and the tax law.

So I'm after a bit of advice on what my options are of it's all grim skies ahead… The amortized amount is about $416k and we have about $289k available to redraw. I know a this stage that if I was to redraw the $289k to put a deposit down on a new house, the portion of the interest that's deductible will be close to $0 due to how much we have contaminated the loan.

Financial Home Loan

Comments

  • kyle on 08/01/2020 - 15:53
    +2
    1. Grab all your statements.
    2. Identify your redraws which I assume are for personal use.
    3. Any repayments in excess of those redraws would reduce the home loan which will then affect the deductible interest when you turn the home into an investment property. Look at the timings of those transactions. So max home loan amount with deductible interest is $350K.
    4. The redraw for the deposit is for home to live in?
    • HighAndDry on 08/01/2020 - 18:48

      Nothing wrong with your comment, but seeing OP's history of decisions, I'd replace steps 2-4 with "2. Take those bank statements to a registered tax accountant."

  • Ocker on 08/01/2020 - 16:04
    -6

    You can only claim a deduction for interest payments if the original purpose of the loan was to purchase an income generating asset. That is your current loan on your PPOR would not qualify for interest tax deductions.

    • Donaldhump on 08/01/2020 - 18:13

      **** me where did you get your tax advice

      • Ocker on 08/01/2020 - 18:58

        The ATO

        • Donaldhump on 08/01/2020 - 20:28

          Well your wrong,
          But by all means follow your advice

  • azngamer on 08/01/2020 - 16:08

    Hey Keyman, could you please elaborate more on how it is contaminated? Was your loan with UBank an offset account? I am planning to turn my PPOR to IP in the near future.

    • stirlo on 08/01/2020 - 16:21
      +2

      Ubank doesn't offer offsets. If you want to turn PPOR to IP you MUST have an offset if you want to claim interest costs as a tax deduction.

    • keyman on 08/01/2020 - 16:21
      +1

      Hey mate, I'm far from an expert on this, I have just spent the past couple days furiously researching this but this is my understanding…

      So UBank does not offer offset accounts. When you take money out of the redraw facility, it is considered as taking out a new loan. If this "new loan" is not used for money making exercises (investment purposes) then that loan is not deductible. Now the redraw facility has been contaminated with a mix of tax deductible and non tax deductible money.

      Then when you insert more money into the redraw facility, that money will be split into a percentage to pay off a portion of tax-deductible and a portion of the non-tax deductible loan. Rinse and repeat the redraws and deposits and the portion of money that is deductible becomes harder and harder to track until you're left with almost nothing at all that can be deductible.

      So now if I was to redraw $289k, and bring my balance back up to about $413k, the annual interest at 2.89% rate will be approximately ‭$12k in interest. That interest will not be tax deductible.

      • azngamer on 08/01/2020 - 16:41

        Thanks @stirlo and @keyman for the explanation. I am terrible when it comes to understanding investment. I too jumped on the property game without fully understanding the tax implications but the broker I had got me an offset account. I assume any offset will not cause contamination? Thanks for bringing it up, I'll have to do some research myself before turning my place to an IP.

        Not sure if this is possible, but would you be able to another home loan to pay off the Ubank loan? As in withdraw $289k, go to another bank that offers
        offset account and get them to pay off your $413k outstanding balance with Ubank. That way you can turn our PPOR into IP with an offset account with the newbank. Since you have more than 20% of the loan you can avoid LMI? Sorry, again do not have a proper understanding of investment property so take this will a grain of salt but I hope you can find a solution to this @keyman.

        • Kenb0 on 08/01/2020 - 17:39
          +2

          As in withdraw $289k, go to another bank that offers offset account and get them to pay off your $413k outstanding balance with Ubank.

          This doesn't work because when you go to another bank to borrow the 413k to pay off the 413k outstanding loan with UBank, the purpose of that loan is to pay off an already contaminated loan, so the interest on the new loan can only be tax deducted to the proportion of the loan that is for investment purposes.

  • stirlo on 08/01/2020 - 16:09

    "and turning our current PPOR into an IP"

    This is your problem. This is only possible with offset. Sell your current PPR, use funds to buy a new PPR and then get an investment loan to buy a new IP. You'll lose stamp duty on the new IP but it's pretty much the only option you have.

  • keyman on 08/01/2020 - 16:17

    Would it be financially smarter for us to purchase the new home as an IP and continue living in the current house until it is fully paid off?

    • arkie0 on 08/01/2020 - 16:43

      Yes, make sure to split the current PPOR loan so you can tax deduct the interest from loan used as a deposit.

      • Ocker on 08/01/2020 - 19:02
        -1

        Will not work as the original loan was not taken out to procure an income producing asset.
        The number of negs. I received on an earlier post about the tax deductability issue clearly shows that many OB'ers have no idea on the issue. As such get professional advice.
        I could offer a suggestion as to an approved legal tax workaround for your problem, but don't want to feed the trolls.

        • Muzeeb on 08/01/2020 - 19:14

          but don't want to feed the trolls.

          OP posted here knowing full well that they would get a lot of unsubstantiated replies. Probably hoping a tax accountant would pipe up with free advice somewhere amongst the bs responses. If they were truly interested they would have bypassed ozbargain and gone straight to a certified tax agent.

        • arkie0 on 08/01/2020 - 21:39

          OR many OzB know a lot more than tax you do?

          Its not the original loan, its a new loan via a split for the purpose of buying a new IP.

    • Donaldhump on 08/01/2020 - 18:14
      +1

      may even be a possibility to live in it for 6 months to get lower stamp duty and then have the option of treating either as a PPOR when it comes time to sell. make that decision later on, taking the 6 year rule into factor

    • kyle on 08/01/2020 - 19:11

      I think that's a lifestyle choice question.

      Never use tax as a starting point to guide your decisions.

  • ATTS on 08/01/2020 - 16:21

    Any good websites to learn

    "intricacies of home loan products and the tax law."

    • Kenb0 on 08/01/2020 - 17:41
      +2

      Go to propertychat forum and read through Terry's tax tips scattered in the relevant subforums

      • ATTS on 08/01/2020 - 18:28

        Thanks

  • iampoor on 08/01/2020 - 18:11
    -1

    You will need to see a tax accountant for some detailed advice but to the best of my knowledge:

    1. Only the initial $350K amount can be considered for interest deductions - the extra refinanced with Ubank was not utilised to purchase the property so it is totally excluded.

    2. Everything that was paid down from that $350K amount is unclaimable. E.G $350K original amount, total paid $200K with subsequent redraw of $100K does not give you a deductible amount of $250K but $150K instead.

    3. Based on what you have done you will need to apportion your interest based on whatever the amount worked out in point 2 is as compared to the total loan.

    One other thing to consider is that if you do go down this road, obtain a proper valuation before turning it into an IP. Say you bought it for $500K and it has risen to $700K. If you have a proper valuation indicating it is $700K, when it is sold down the road that would be the base price used in the CGT calcs as the increase in value was when it was your PPOR and exempt from CGT.

    *The above is not financial advice and might be wrong. Pay someone with PI to provide you with written advice so if things go south and the tax man comes after you, you can claim it against that person.

  • kyle on 08/01/2020 - 19:08

    We've actually got a few clients with similar problems to yours. As per my initial general advice, you need to work out how much of the $350K you have paid off when you deposit your salary. Your deductible portion of the loan cannot go back up to $350K once paid off.

    The other thing you have got to remember is that negative gearing is only good if the current economic environment is one where there is significant capital growth outweighing the interest you are paying and the deductions you are getting.

  • Gelato on 08/01/2020 - 21:34
    +1

    hey OP dont have to feel so down, on the bright side the competitive rate at Ubank and the fact that you've been pumping money to your redraw acc had helped you save up faster for the next home.

    im noticing a trend that banks that offer competitive rates (ie. ubank, athena) dont have offset features available to customers.

  • ziaxk87 on 08/01/2020 - 22:39

    keep this as PPOR and take another loan as IP… i beleive you do not get taxed on PPOR

  • Waldo000000 on 09/01/2020 - 12:33
    -2

    Have you worked out if your investment property will have more or less rent than interest charges?

    Because unless you'll be negatively gearing (i.e. "losing money" during the time you own the investment property), you've got nothing to worry about, as you wouldn't have been able to deduct interest payments from your income regardless of your loan situation.

    • t_c on 09/01/2020 - 19:21

      Why not?

    • Waldo000000 on 10/01/2020 - 15:35
      -1

      Ah, I could be wrong here. I might have been confusing:

      1) deductions from rental income (which you may be affected by), with
      2) deductions from "other income" (like your salary, aka negative gearing, which you'd only be affected by in the scenario that I mentioned above)

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