Where Can I Park Borrowed Money until IP Purchased without Losing Tax Deductablility

I just refinanced my PPOR loan as mentioned below along with equity extraction for investment purposes.

Split 1) 390K P& I with offset
Split 2) 150K P& I without offset

Note : I also have 240K as savings. My bank asked, where can they deposit that equity part (150K) ?

We have few options but everyone's opinion is different. Not sure which way is correct without losing tax deductibility of that loan 150K.

Option 1) Ask the bank to deposit that equity in offset linked with Split 1. But I can't deposit my savings (240K) here and mix deductible &non-deductible funds which will have impact on tax time.

Option 2) Ask them to deposit in a separate savings/transaction account which has zero funds initially. But this may add interest amount(normal savings bank interest rate on 150K) on top of deposited 150K. The other problem here is that 150K is not saving any PPOR interest as it is sitting in a savings account. But I can deposit 240K in offset linked with Split 1.

All these losses will be increased the more I delay the IP purchase as either 240K (option 1) or 150K (option 2) is not really saving any interest until that period.

Please guide me how you did this ?

Note : I had constant chats with my broker & accountant but as I said everyone thinks there point is correct.

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Apologies everyone, after reading your comments I understood that my above post lacking some crucial points.

Here goes - please bear with me, I'm first time investor learning things now :)

1) Refinanced my current loan to extract equity for investment purposes. So the structure is
Split 1 (non-deductible debt ) with offset
Split 2 ( equity extraction part) without offset.
2) I understand that split 2 is tax deductible ONLY when I use it for income producing purposes (in my case it is buying IP). That can happen even after 6 months so it is tax deductible only after 6 months onwards.
3) Now my actual question is where should I park that split2 amount until it is used for IP purchase so that it is not contaminated with my personal savings.

I hope 3rd point tells you my confusion.

What I hear from accountant(s) is
* Usually bank deposit that Split2 amount in Split1 offset. I will have to move that amount to Split2 Loan accountant asap. Wait until IP is purchased. Use that amount for IP expenses directly from Loan account.

But problems with my accountant view is
A) Most of the banks don't allow EFT from loan accounts. Banks suggest to transfer those funds to savings account and use for IP with EFT or cheque.
B) Transferring borrowed funds between loan account and savings/offset accounts is contaminating. So the connection between source and use of funds is destroyed.
C) When the bank deposit equity amount in Split1 offset - it is contaminated if the offset already contains my personal savings before bank deposit. This is a complete NO from ATO tax perspective.

Hope this makes sense. As I said please I'm here to learn and grow. And this is not the place for financial advise but what I'm trying to find out is how people did this and what they experienced. I can't depend on my accountant as end of the day I'm responsible for everything.

Comments

  • +3

    I'm no accountant but considering the IP isn't purchased yet what makes you think your fat stax of cash are already tax deductible? Once you buy the IP you own a tax deductible asset and regular rules apply, but the money you borrowed itself isn't tax deductible without the asset… My first thoughts anyway.

    • Yes I knew that cash is not deductible until I purchase IP. I'm asking how/where can I keep that amount so that it is not contaminated with my personal savings. I'm talking about that "regular rules".

      • Doesn't matter. Irrelevant. Put it under your mattress if you want, 150k is 150k.

  • +2

    The question appears strange.

    Nothing is deductible until your make a purchase, so not sure exactly what the question is.

    If the intent is to use the $150k as a deductible loan, it would seem that the best thing to do is leave that cash in the loan and redraw it when the time comes.

    So far as the savings are concerned, and on what you've presented, this should be in the offset account.

    • +1

      I would put the 150k in the PPOR offset personally (if that's an option) so he saves whatever his interest rate is on that PPOR loan until his IP finalises and he can move the 150k to pay for the IP.

      Edit: this is assuming that the 150k is required as a deposit for the IP? If it's not, then I don't know what OP is on about.

      If he's trying to maximise tax benefits then the idea is to negative offset heavily meaning you'd rather the least amount of money on your IP paid off or offset and most in your PPOR Offset to reduce your loan costs.

      • But does that actually change anything? I'm assuming the whole show is effectively PPOR at this stage?

        • +1

          If he's just refinanced PPOR to extract equity he seems to be under the impression it's instantly tax deductible but I don't believe it is. If the fresh equity gets parked in PPOR Offset until IP is finalised it's essentially "no change" from before his refinance except he's made the funds more accessible.

          • +3

            @Dvbargain: Yes, it's the part about it being "instantly tax deductible" that is flawed in the OP.

            The typical move in these situations is to split your PPOR loan in two.

            One half is the actual PPOR bit that will usually be the total amount you owe the bank currently.

            The other half is fully "paid off" but ready to be redrawn when the IP opportunity comes along, ideally with an attaching offset account.

            At that point, the redraw on the second part happens, that part is tax deductible in full (so long as it's kept clean) and away you go.

            It looks like the structure OP has is probably about right, but it's the chatter about it being deductible now that is clouding the issue.

            • +1

              @Seraphin7: Agreed, your knowledge on redraw is greater than mine as I've never used the function, but not much different to having it on offset in practise it sounds like.

              I think based on OP he hasn't set up the refinance like you're proposing though, so may need to use his PPOR offset account like a redraw :)

            • @Seraphin7: Can you please explain on "so long as it's kept clean" ?
              My question is actually on that point. How can I keep it until I purchase IP without mixing with my personal savings ? And moving funds between offset & loan accounts is not a clean approach I guess.

              • @ppp13: "Keep it clean" is simply to say get your IP loan account set up and "don't touch it" other than to pay down the loan if/when you want to. Do not put any other monies through it. This simply means that (all else being equal) every charge booked to that loan (almost entirely interest) is then deductible and it keeps your accounting simple at tax time.

          • @Dvbargain: I'm not under the impression of it is instantly tax deductible. I know it is only when I purchase IP.

            If the fresh equity parked in PPOR offset then is not it contaminated if that offset contains my personal savings ? How can I prove to ATO on which funds are deductible and which not ?

    • thanks for that input.
      Yes my intent is to use 150K as a deductible loan.
      The bank deposits that amount in offset linked with split1. Is not that contaminated if that offset contains my personal savings ? OR is not that mixed funds ?

      "it would seem that the best thing to do is leave that cash in the loan and redraw it when the time comes."
      Moving those funds from offset1 to actual loan is losing the connection between the source right ?
      Most banks don't allow to use those funds from loan account directly then how to use those funds ?

  • +1

    OP just refinanced a loan which means the bank is lending him money against some sort of collateral (a property) now.

    It is the use of the property that governs the tax deductibility of the funds borrowed not any mystery to be decided purchase.

    • Not sure I read OP same way, he doesn't mention existing collateral. But at this point without OP clarification we are just chatting cos we're bored :p

      Edit: read that he mentions delaying an IP purchase.

      • His PPOR is the collateral.

        He wishes to have $150k of deductible loan against his PPOR until he buys an IP.

        I don't think that will happen.

        • If that's the case, agreed.

        • Nope that's not my intention. I know it is not tax deductible until it is used for income producing purpose.
          My question is where can I park that fresh equity without contaminating with my savings.

  • -1

    Lol this guy

  • Listen to your accountant, not your broker. One should have studied tax law, the other just has opinions.

    If you ask the internet you'll just get more opinions. Listen to your accountant and if the ATO pull you up on it he can defend the position for you. Or just call the ATO yourself and ask them.

    • Yes but even my accountant opinion is flawed. End of the day I'm responsible if my accountant does something wrong. So I'm taking real people opinion.

  • Park it into a interest bearing savings account. As you are using the loan money to to generate income (you could say this is similar to negative gearing), the funds are immediately deductible and when you invest it in an IP, deductibility is maintained.

    Otherwise let the bank settle the loan funds into a empty account and then you transfer it back into the loan account ASAP. Redraw only when you are ready to invest in your IP.

    • Is that actually justifiable to be tax deductible? I'd be very suprised if it was…….

      Second bit about transferring into the loan makes sense awaiting redraw for the IP.

      • +1

        There is a tax ruling on this.
        https://www.ato.gov.au/law/view/document?DocID=TXR/TR9533/NA…

        In summary is if the expense wasn't incurred then the income wouldn't be earned then it would be deductible, but if the expense exceeds to income the the motivations would be looked at.

        In this case OP borrowed money with the intention to invest in IP but isn't quite ready, so he temporarily parked money in some other safe & income generating investment.

        • Quite interesting. Thanks.

    • Is not that moving between accounts is actually losing connection and not clean ?
      and that empty account can be savings or offset of PPOR ?

      • Don't mix non deductible and deductible into 1 account and you will be ok, and make sure each deductible loan account can be traced to exactly one investment.
        So perhaps you take the loan funds to invest in interest bearing account or ETFs. Then its deductible. Then you sell those shares or use the interest bearing account funds to buy property. You can still trace it back to the loan account. Just make sure if there's surplus funds it goes back into the loan account, that way you only have 1 loan account per investment. And save all your statements and transaction receipts, put good clear transaction descriptions.

        If you use interest bearing savings account or use it to buy shares then you can go straight from the account to your IP purchase (it might be better to send it the the loan account and redraw in any case). Otherwise funds should be sent back to the loan account to have $0 balance and then redrawn. Make sure interest for the month is posted before redrawing. Be careful some banks might automatically close your loan account if you have $0 outstanding, so check with the bank first. If that's the case best you can do is leave $0.01 outstanding before redrawing. In theory interest on the $0.01 will not be deductible and but it would be negligible.

  • The bank doesn't just give you $150,000 in cash. It will open a new account for you and place the money into it. You simply leave the money in the new account until you are ready to buy the new property.
    If you were ready to buy the new property strait away, the bank would do the same thing, account with money in it, and then a bank cheque for you to pay at settlement. Only difference is you don't need the cheque, at the moment.

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