Contamination of borrowed and non-borrowed funds in offset account

Hi all,

I think I may have got myself into a financially dangerous situation from a tax perspective and would appreciate some suggestions on how to rectify the situation.

I currently have no personal debt (PPOR or elsewhere) and have recently transferred my home equity loan from a LOC to an IO home equity loan with another bank after switching mortgage brokers as I wanted to use some personal savings in an offset account to reduce interest paid (LOC doesn?t have offset facility).
The home equity loan is used for deposit plus acquisition costs for a couple of investment properties.

So I got a new home equity loan with a 100% offset account linked to it. I?ll round out the figures below for simplicity sake.
Home equity loan is for $600,000 with $150k already drawn down. At settlement time, the bank fully drew down the loan and deposited the balance of the funds into the offset account ($450k) linked to it.

As I had $150k in cash sitting in a low interest savings account, the plan was to use this to reduce interest on the home equity loan so I deposited it into the offset account. After reading other posts, I now realise this is a dangerous thing to do as I have borrowed funds ($450k) and non-borrowed funds ($150k) in the same offset account. I also believe that if I now withdraw the $150k (non-borrowed funds) from the offset account at a later date and use it for non-income producing assets (which I plan to do in a couple of years) or even income producing assets, I won?t be able to claim a tax deduction on the $150k of debt in the home equity loan, even though I am withdrawing my own savings from the offset account and not the loan account.

I think what I should have done at settlement time when the bank deposited the $450k into my offset account, was to pay it straight back into the loan and use the redraw facility and therefore I could have then put my personal savings into the offset account but hindsight is a wonderful thing.

Is there any way to cleanly rectify this situation as I believe the damage has already been done?
Is there any point at this stage in moving the money the bank put into my offset account at settlement time ($450k) back into the loan and using the redraw facility in the future as required? I only ever plan on using the money in the home equity loan for income producing assets.
It?s not going to be a major deal for the next few years as I won?t need these personal funds ($150k) I deposited into the loan or is it?

If I leave things as they are does that mean that approx. 75% of the interest on any future withdrawals from the offset account will be tax deductible and 25% won?t be (because $150k of the $600k in the offset account i.e. 25% is non-borrowed funds).

Any suggestions on the best way forward would be appreciated.
 
How long ago did the borrowings end up in the account and how many transactions since?

I'm not a tax guy but I'd suggest there are a number of simplistic solutions if the mess hasn't been around long

Ta

Rolf
 
This is messy.
you could possibly rectify it but it would not be easy. You would have to split the loan and then repay the private portion - the mess - you could then reborrow it again and not mix it.

If you repay hte loan as it you will create a further mess so lease seek tax advice before proceeding.
 
How long ago did the borrowings end up in the account and how many transactions since?

I'm not a tax guy but I'd suggest there are a number of simplistic solutions if the mess hasn't been around long

Ta

Rolf

The borrowings ended up in the offset account just over 2 weeks ago. There has been a couple of property related expenses just shortly after that. The non-borrowed funds were transferred to offset about 5 days ago and no transactions since then on the offset account.

I have touched base with my accountant and will try and get to see him later this week.
 
I would be repaying the 450k immediately and only drawing down as needed for investment. Depending on the bank you can have multiple offsets so one could always be empty to tfr funds as needed. Other banks let you pay directly from the loan account ..... Westpac come to mind and that to me is the preferred option. I am not a fan of leaving loan funds in offsets.

Question for your accountant hopefully your original 150k deductible loan is unaffected.
 
I would be repaying the 450k immediately and only drawing down as needed for investment. Depending on the bank you can have multiple offsets so one could always be empty to tfr funds as needed. Other banks let you pay directly from the loan account ..... Westpac come to mind and that to me is the preferred option. I am not a fan of leaving loan funds in offsets.

Question for your accountant hopefully your original 150k deductible loan is unaffected.

Dangerous!

The loan is now a mixed purpose loan.
$600,000 loan
$150,000 relates to the purchase of the house
$450,000 relates to parking in and offset and mixing
----------
$600,000

Note the portions of the loan
$150,000/600,000 = 25%
$450,000/600,000 = 75%

25% of the interest would be deductible at this point.

If $450,000 is repaid it cannot simply come off th $450,000 portion as it is one big loan.

When the $450k is repaid 25% of it will come off the $150k loan.
The new deductible portion would be
$125,000 - $112,500 = $112,500

Deductibility halved.

The only solution is to split the loan before repaying into 2 separate splits
$150,000 and
$450,000

The $450k cash can then be paid off the $450,000 loan. When investing the money can then be borrowed from this loa account and if paid directly and not parked there shoul be no tax issues.
 
Thanks for the response Terry. I'll definitely try and get to see my accountant this coming week and also my mortgage broker and get this situation fixed up.
 
I got into a similar mess recently. Borrowed 114K through the equity in one of my IPs. It was parked in my offset account. This was 2 weeks ago. The next IP settled on Thursday and 109K out of the 114K was deducted by the bank for settlement.
So, the remaining 5K is in my offset account atm.
What should I do to rectify this, if anything?
 
I got into a similar mess recently. Borrowed 114K through the equity in one of my IPs. It was parked in my offset account. This was 2 weeks ago. The next IP settled on Thursday and 109K out of the 114K was deducted by the bank for settlement.
So, the remaining 5K is in my offset account atm.
What should I do to rectify this, if anything?

Bump! Bump!
 
Put the $5000 back into the IP?? I refinanced recently, and was advised to put the equity drawn out back into the IP i drew from, and redraw from it only when required (ie. deposit, settlement for new IP).
 
I got into a similar mess recently. Borrowed 114K through the equity in one of my IPs. It was parked in my offset account. This was 2 weeks ago. The next IP settled on Thursday and 109K out of the 114K was deducted by the bank for settlement.
So, the remaining 5K is in my offset account atm.
What should I do to rectify this, if anything?

You can't rectify it. How much money was in the offset at the time of deposit?
 
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