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.
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.