Finance structure & cost offset

[jelsa2]

Hi all
Just refinanced 2 IPs x I/O loan each with Macquarie. I asked broker for an offset account to park excess funds as I'm slightly + geared. I also asked for a LOC to collect rent and hav the mortgages to direct debit from and any expenses for IPs from here.
Today I go to sign contracts & broker has not set up offset, said he didn't remember our conversation. I'm going overseas for 5 weeks next week & broker says to rectify now will hold up proceedings for the accounts which need to be active while I'm away.
2 ques
1/ Hav I set up the accounts the best way?
2/ will setting up a offset acc on my return cost more & can it be done later?

Thanks in advance

 

[Rolf Latham]

Sounds like u might have been put on the basic product vs the offset ?

Redoc and settle when get back perhaps ?


Else a product switch after settlement

Ta

Rolf

 

[jelsa2]

Thanx Rolf can't do anything now b4 I go.

 

[Colin Rice]

I also asked for a LOC to collect rent and have the mortgages to direct debit from and any expenses for IPs from here.

Not clear on what you mean in regards to the above?

Would seek tax advice if you are planning on deducting capitilised interest via a LOC as it is a grey area from ATO perspective.

 

[jelsa2]

Hi Colin
I'll try to improve my explanation.

I have a LOC account where the rental money minus expenses from both IPs will be deposited by the Property agency.

Loan 1 & Loan 2 Interest payments will be direct debited from that LOC. If there are other expenses for the IPs this will also be taken from LOC.

Is there anything wrong with this process?

At the moment I don't have an offset set up but will on my return if I can so I can deposit + funds left over. Broker said to put any excess into paying loan off, but I'd prefer putting into offset which will allow me more flexibility in the future.
Any thoughts?

 

[Peter_Tersteeg]

I think you're asking for trouble with the ATO some time down the track.

Better to put the rent into an offset account as well as other personal income, and have the repayments come out of that offset account.

You can use a LOC as a loan to pay expenses such as maintenance, property management, rates, etc. Make sure the interest payments for that LOC are also made from the offset account.

If you've got a non deductible loan (such as a mortgage against your PPOR), link the offset account to that loan. If you want to pay off a loan, this is the one to target but using your offset account is technically better.

 

[jelsa2]

Hi Peter

Thanks for the info, can you explain why it's a problem using the LOC this way? I've always tried to keep investment money separate so that it was easier to deal with at tax time. I will probable buy some shares from the funds in the LOC would this be a better use? Again I would deposit the dividends back into the LOC account?

Thoughts?

 

[jelsa2]

BTW I don't have a PPOR at the moment as I'm moving in to partners house. Will get an offset on my return from my trip.

 

[Peter_Tersteeg]

There's two places you're storing cash here. The offset account and the LOC.

Income goes into the offset account. This includes your salary and rent received.

The LOC is a loan, so it's effectively the same as using equity or redraw like any other loan. This is not a good place to store income.

By moving money through the LOC as you suggest, you're mixing income (from the rent) and equity. Not good. Additionally most people simply let their LOC capitalise interest (they're usually set up that way by default). If you're intending to claim the interest on the LOC, you'd be claiming interest on interest. I believe the ATO has a problem with this practice.

 

[Colin Rice]

Is there anything wrong with this process?

What Peter said

Keep it simple and use the offset for money in money out.

LOC have there place (arguably) but capitilising interest and then deducting the interest is not recommended and is likely to be deemed a "tax scheme" by the ATO.

Safest practice is to pay the interest on a monthly basis from an external offset/transaction account if you do use a LOC.

 

[Terry_w]

Capitalising interest is ok - there is a TR saying so.

But it can be an issue if you are doing it to pay off the home loan sooner. If there is no home loan (non deductible portion) then this won't be an issue.

Nevertheless I would not do it without a private ruling. Much easier to use an offset account.

 

[jelsa2]

Thank you all for that. I might give the ATO a call to check, but thank you for saving me!