Deductibility of interest - offset vs redraw

Discussion in 'Accounting & Tax' started by a_schafs, 9th Mar, 2010.

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  1. a_schafs

    a_schafs New Member

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    Hi,

    I received some conflicting advice from a broker and a financial planner recently and I'd be interested in another opinion (knowing it doesn't constitute formal advice etc etc).

    Our situation is similar to this; let's say we have approximately 200k owing on our PPOR. We actually have 200k sitting in a linked offset account as well so effectively aren't paying any interest for now (but we kept the money in there to keep our options open if we move).

    We are now looking to buy an investment property for 300k. We were taking a new interest-only loan for 80% (240k). We expect to need around 360k all up - so another 120k taking into account deposit, stamp duty and likely renovations after the build.

    It was suggested we could split the current P&I loan we have on our PPOR into two 100k loans - one P&I for our PPOR itself and another interest-only for these investment expenses. This seems to make sense from a traceability point of view.

    My question though is, is it sufficient to just split the existing 200k loan or would we need to pay down the loan by 100k and then set up a new loan for this?

    From my (limited) understanding, I would need to pay down the loan first - otherwise its "purpose" is still for the PPOR and is not deductible. This obviously has implications later if we turn our PPOR into an IP but that's probably okay for us.

    I've read a few ATO rulings (dry and boring!) and a bunch of forum posts here (I'm new but this seems like a great resource so far!). Any further comments would be much appreciated...

    Thanks,
    Andrew
     
    a_schafs, 9th Mar, 2010
    #1
  2. Simon Hampel

    Simon Hampel Founder Staff Member

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    Hi Andrew, welcome to InvestEd.

    My initial thought is that you are correct ... you won't be able to just split the loan - I would think that the original purpose of the loan (private use) would remain intact and you're effectively just using cash in the bank to pay the deposit on the IP.

    I think you will probably need to pay the deposit money into the PPOR loan account, and then either redraw it, or split the loan, or set up a new loan facility to then create a new borrowing which would then be deductible.

    Do you have a redraw facility on the loan (ie will the bank allow you to get the money back out again after you've paid it down) ?

    I would imagine that the easiest thing to do is going to be:

    1) pay $120K into the PPOR loan
    2) ask the bank to split the PPOR loan into two facilities, one for the remainder of the P&I loan (if you prefer to keep it P&I), and a new facility for $120K being IO.
    3) draw out the $120K from the new IO loan and use that as the deposit on the IP

    Note that you should check with the bank that they will indeed allow you to split the loan. Alternatively, look at whether you could potentially refinance the PPOR with a lender that will allow you to set up this loan structure (although this might take some time).
     
    Simon Hampel, 9th Mar, 2010
    #2
  3. Superman__

    Superman__ Well-Known Member

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    It would be a lot easier to pay down and split the loan.

    Having two separate loan accounts - one for your PPOR and another your investment property will also make it a lot easier for your accountant!

    Have you received any advice on an appropriate structure for the ownership for the investment property?

    SM
     
    Superman__, 9th Mar, 2010
    #3
  4. a_schafs

    a_schafs New Member

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    Melbourne, VIC
    Thanks for the comments, guys.

    Sounds like a proper split/redraw is probably the way to go. Yes, I do have a redraw facility with my bank so that is something to explore. I am speaking to a few people about the loan structure, this was just to try and resolve some conflicting info.

    I can appreciate that I do need to split them for traceability of expenses if nothing else.

    Thanks,
    a_schafs
     
    a_schafs, 10th Mar, 2010
    #4