Explaining an Offset Account

[Infest]

Hey guys,

Just wondering if someone could explain an Offset A/C to me?

I'm trying to figure out the best way for me to go, as I'm only 18 and have bought my first house. Which soon will be turned into an IP after I receive the FHOG.

I was wondering if I could find out the +/- of such an account.

I'm not completely sure on what it does? Does it just stockpile money?

Thanks guys...

Michael.

 

[Rob Williams]

This has been covered a few times on the forum.
Briefly, let's say you have a $100,000 variable loan with an offset account attached to that loan account. It's an interest only loan, too, by the way.
Each day, interest is calculated on the loan balance, which currently stands at $100k.
You have some money, say $20,000 sitting in a high interest account earning a whopping 5% or less. By the time you declare that in your tax return and pay tax on it, you won't be left with too much at all. Factor in inflation and your'e actually losing money.
However, if you deposit that money into your offset account and do nothing else, your daily interest charge will be calculated on $80,000 as the $20k deposit offsets the loan balance. Hence the name of the account
You are saving on interest expense. It's not income so you don't have to pay tax on it.

 

[Infest]

This has been covered a few times on the forum.
Briefly, let's say you have a $100,000 variable loan with an offset account attached to that loan account. It's an interest only loan, too, by the way.
Each day, interest is calculated on the loan balance, which currently stands at $100k.
You have some money, say $20,000 sitting in a high interest account earning a whopping 5% or less. By the time you declare that in your tax return and pay tax on it, you won't be left with too much at all. Factor in inflation and your'e actually losing money.
However, if you deposit that money into your offset account and do nothing else, your daily interest charge will be calculated on $80,000 as the $20k deposit offsets the loan balance. Hence the name of the account
You are saving on interest expense. It's not income so you don't have to pay tax on it.

Ok and from that:

Is an offset account something you can make anytime you want? How can I sign up for one? And say, I had no savings after buying a house, could I contribute like $100-$200 a week into that account? Or is it not worth doing that???

Thanks.

 

[Pushka]

It is always worth doing; I keep adding to our offset account each week. The loan needs to be set up with the offset facility when it is taken out - it forms part of the contract. You can also take money out of the offset account whenever you need it and keep tax deductibility of the interest payments of the loan(if an IP); on the other hand, if you had put excess money into the loan instead of the offset account, then later withdraw it for personal reasons then this will create problems in claiming interest as a deduction. Rolf explained this really well a few days ago - worth a search for his name!

 

[LynnH]

Infest

Some loans allow offset a/cs, others don't ... and others offer only partial offset a/cs. One of our knowledgeable MBs would be able to point you in the right direction.

Cheers
LynnH

P.S. You're too quick, Pushka ...

 

[Pushka]

Infest

Some loans allow offset a/cs, others don't ... and others offer only partial offset a/cs. One of our knowledgeable MBs would be able to point you in the right direction.

Cheers
LynnH

P.S. You're too quick, Pushka ...

Nah, great minds think alike and all that!

 

[Infest]

Ok, so if I get a loan, say a month later I am able to create an offset account?

Something I will have to look in to.. No fees or anything?

 

[Pushka]

Ok, so if I get a loan, say a month later I am able to create an offset account?

No, when you get the loan, at the time of getting it you will need to tell the Bank/Broker that you want it to be attached to an offset bank account. Check, before you sign up, that the institution you are borrowing from allows this. All Banks do. But it will need to be organised at the time of establishing the loan because it changes some of the conditions in the loan contract.

 

[Infest]

No, when you get the loan, at the time of getting it you will need to tell the Bank/Broker that you want it to be attached to an offset bank account. Check, before you sign up, that the institution you are borrowing from allows this. All Banks do. But it will need to be organised at the time of establishing the loan because it changes some of the conditions in the loan contract.

So if I've already applied for the loan and just waiting for approval, does that mean I'm too late? Or once they accept me for the loan is that when the conditions are madE?

 

[Qlds007]

Infest it will depend on who the lender is and how the loan is set up.

I assume you went with an interest only loan especially given the fact that the property will be rented out in the future so if your lender offers an offset account then you should be able to link it to the mortgage.

As for fees and charges it depends on the lender as i say.

 

[Pushka]

So if I've already applied for the loan and just waiting for approval, does that mean I'm too late? Or once they accept me for the loan is that when the conditions are madE?

Have you completed all the contracts yet? probably not, you have probably just submitted the first application for approval. Contact the lender Monday and see if it can be included.

 

[Rob Williams]

Assuming your loan allows you to set up an offset account, it's worth putting anything you can into it. I get all my rents paid into mine. Every dollar that's in there helps.
Offset accounts Rock. Right up there with the ITWV. Both great tools for the humble investor

 

[Infest]

Haha, sorry for the dumb question. What's an ITWV?

 

[Rob Williams]

Haha, sorry for the dumb question. What's an ITWV?

The only dumb question is the one you don't ask.
Income Tax Withholding Variation.
When you have negative geared IP's and fund the shortfall from your "day job" you can wait until financial year end to get back the tax on the negative gearing losses, or you can complete an ITWV and the ATO will write to your employer and allow them to tax you at a lesser rate than usual such that you recoup your tax benefits on a pay by pay basis, instead of waiting until financial year end.
For example, if you are expecting $6,000 back on your tax as a result of your IP losses, then that would translate to paying $500 per month less tax if you get paid monthly.
That means your net pay goes up $500.
I use that adjustment to pay for additional IP's. It's a beautiful thing.

 

[Infest]

The only dumb question is the one you don't ask.
Income Tax Withholding Variation.
When you have negative geared IP's and fund the shortfall from your "day job" you can wait until financial year end to get back the tax on the negative gearing losses, or you can complete an ITWV and the ATO will write to your employer and allow them to tax you at a lesser rate than usual such that you recoup your tax benefits on a pay by pay basis, instead of waiting until financial year end.
For example, if you are expecting $6,000 back on your tax as a result of your IP losses, then that would translate to paying $500 per month less tax if you get paid monthly.
That means your net pay goes up $500.
I use that adjustment to pay for additional IP's. It's a beautiful thing.

ANd with such a thing, how do you determine how much "IP losses" you are going to make and how much tax to claim? Is it hard to get one of these letters / get your employer to agree to it?

 

[Rob Williams]

ANd with such a thing, how do you determine how much "IP losses" you are going to make and how much tax to claim? Is it hard to get one of these letters / get your employer to agree to it?

The online form steps you through the process. You just need to know your rental income, expeneses, estimate of depreciation etc and it works out your total losses and tax situation.
The ATO wrote to your employer and tell them the flat tax rate to tax you at. Employer doesn't have any say in it. They just tax you at that rate.
It's quite easy.
Here's a link to the PDF form you can print out to help you gather the info. Then you can complete the online version.
http://www.ato.gov.au/corporate/content.asp?doc=/Content/00136083.htm
Here's a link to another thread on the topic.
http://www.somersoft.com/forums/showthread.php?p=460198&highlight=ITWV+link#post460198
It's worth doing and is a great cash flow tool.

 

[Pushka]

But be conservative with your variation - there is a penalty if it works out you over estimated your losses, and secondly, you will get it back when you reconcile at the end of the financial year so it is never 'lost'. As Rob said, it is indeed, a beautiful thing! That and depreciation!

 

[Infest]

LOL, every time you use a term, I don't understand what it means / how it works.

Can you give me an explanantion on how 'depreciation' works in property?

 

[Pushka]

You depreciate the value of things associated with your property every year - eg building is depreciated around 2%; curtains maybe 5%; oven at maybe 15% (each item has a prescribed depreciation rate from the ATO) and this is added up and then the amount deducted from your taxable income. If your property is new, it can give several thousands of dollars back. It does get added back on when you sell though. A depreciation schedule is prepared by a specialised service provider (there are several on this forum) and costs maybe up to $250. A must for ever property investor.

 

[Infest]

You depreciate the value of things associated with your property every year - eg building is depreciated around 2%; curtains maybe 5%; oven at maybe 15% (each item has a prescribed depreciation rate from the ATO) and this is added up and then the amount deducted from your taxable income. If your property is new, it can give several thousands of dollars back. It does get added back on when you sell though. A depreciation schedule is prepared by a specialised service provider (there are several on this forum) and costs maybe up to $250. A must for ever property investor.

So if I use the ITWV, I can use depreciation as part of that? And the point of an IP is that your not going to immediately sell it so therefore you would not have to pay it back for some time (until you sell?)