How does an offset account impact on tax deductions?

[tinky]

Hi all,

As you are all so helpful, I thought I would clear something up which I'm not 100% sure about.

We have an investment loan for our investment properties. We currently rent so don't have a PPOR. Our offset account gets all our salaries paid into it and is what we use to live off. As the offset helps to reduce the tax paid on our investment mortgage, the tax man is helped by our savings. My question is, what happens if you take out a large chunk of money from the offset account to buy a personal item such as a car or go on holiday? The interest on the investment loan will now be higher as we have less savings to offset against the size of the loan. Is this ok with the Tax man (bearing in mind that if we had no offset the interest payments would be much larger).

I hope the above makes sense!

Thanks in advance for your thoughts.

 

[Rolf Latham]

Hiya Tinky

No issue,,,,,,,,,,,,,,,,,,,unless the mone in the offset acct is borrowed equity

then it can get messy

tarolf

 

[tinky]

Hiya Tinky

No issue,,,,,,,,,,,,,,,,,,,unless the mone in the offset acct is borrowed equity

then it can get messy

tarolf

hmmm thanks for your comments.

currently we have some surplus money in a redraw account (before the days of offset accounts). We are currently refinancing and getting one large loan which will include our current investment mortgage (with redraw) and a new investment property. It sounds like I should withdraw the surplus money from our investment redraw account and put it into our new savings offset account so the split is clear from the start?

 

[marg4000]

Tinky, if you redraw from your investment loan then that part of the loan will become non tax deductible if you use it for non-investment purposes. What you propose sounds as if will become a complete mess.

Offset account money remains outside the investment loan, simply reducing the interest payable. You can do whatever you like with the money, and as the offset reduces the tax-deductible interest increases. For that reason, offset accounts are fine. It is re-draws that cause the problems.
Marg

 

[johnduncan2]

An offset account is a savings account linked to a loan which offsets the interest that you pay on it.

In your case there is no problem with deductability unless some of the funds comes from borrowed money.

 

[redsquash]

An offset account is a savings account linked to a loan which offsets the interest that you pay on it.

In your case there is no problem with deductibility unless some of the funds comes from borrowed money.

If the funds come from borrowed money what possible problem might there be in this case.

If funds come from borrowed money into an offset account and redrawn on non personal items then things remain uncomplicated . is that true?

 

[alexlee]

If the funds come from borrowed money what possible problem might there be in this case.

If funds come from borrowed money into an offset account and redrawn on non personal items then things remain uncomplicated . is that true?

With regards to the interest on the loan that the offset account is linked to, it's clean. With regards interest on the loan that was used to produce the money originally put into the offset account, it's contaminated.
Alex

 

[redsquash]

With regards to the interest on the loan that the offset account is linked to, it's clean. With regards interest on the loan that was used to produce the money originally put into the offset account, it's contaminated.
Alex

Thanks alex, but if the items are of a non personal nature , ie for investment , then how is it contaminated . What is it contaminated with.
Can someone explain further .

 

[alexlee]

Thanks alex, but if the items are of a non personal nature , ie for investment , then how is it contaminated . What is it contaminated with.
Can someone explain further .

Tinky was talking about using the offset amount for personal consumption.

So say I have an account offset 1 with a balance of 10k tied to IP1. I refinance IP2, take out 15k and put that money into offset 1. Now, all of the interest on both loans is deductible because it's all for investment purposes and I have 25k in the offset account.

However, if I use part of that 25k for a holiday, what happens? It's contaminated because while I can use the original $10k for consumption without affecting the deductibility of IP loan 1 (because as the others have said an offset account is a separate account), that $15k from IP2 is affected. Can I say 'I'm using the original 10k and not the 15k from IP2'? That's the messy part.
Alex

 

[touchingcloth]

Am I correct in thinking that an offset investment loan is the way to go as it gives the greatest control over the negative gearing offset?

i.e if interest rates rise, then I can increase the offset savings to make sure that no offset is 'wasted'. Vice versa if interest rates fall.

 

[alexlee]

Am I correct in thinking that an offset investment loan is the way to go as it gives the greatest control over the negative gearing offset?

There is no such thing as a negative gearing offset. An offset is an account where the balance 'offsets' your loan account. Negative gearing is when you gear into an investment resulting in a net tax loss.

i.e if interest rates rise, then I can increase the offset savings to make sure that no offset is 'wasted'. Vice versa if interest rates fall.

The offset is never 'wasted'. Whatever you put in the offset always 'makes' the same rate as your mortgage interest. That's your base opportunity cost. So if interest rates were 8% and you could make 10% on shares, then you might consider using money from the offset to put into shares.
Alex

 

[poyner]

The offset is never 'wasted'. Whatever you put in the offset always 'makes' the same rate as your mortgage interest. That's your base opportunity cost. So if interest rates were 8% and you could make 10% on shares, then you might consider using money from the offset to put into shares.
Alex

Very true, as long as the 10% on shares is after Tax. Because any amount in your offset is earning 8% tax free.

 

[touchingcloth]

There is no such thing as a negative gearing offset. An offset is an account where the balance 'offsets' your loan account. Negative gearing is when you gear into an investment resulting in a net tax loss.



The offset is never 'wasted'. Whatever you put in the offset always 'makes' the same rate as your mortgage interest. That's your base opportunity cost. So if interest rates were 8% and you could make 10% on shares, then you might consider using money from the offset to put into shares.
Alex

Thanks for your imput Alex. However, I'm not sure if I made myself clear, or am totally missing the point (which I probably am). So here's an simplistic example (without other expenses):

1. I have a loan of $200K @ 10% and an offset facility which I start off with $20K. Net interest paid on $180K = $18k per annum

2. I receive rental income of $15K per year

3. Therefore tax offset = $18k-$15k= $3k per year

4. I work and earn $50K a year. Tax on income = $8k

5. Total tax payable with offset = $8k-$3k(offset)= $5k per annum


Is it possible to constantly adjust the balance in the offset account during the year to make sure that the tax payble is recovered 100%? (depending on whether interest rates/expenses/income goes up or down?)

Thanks

 

[alexlee]

Thanks for your imput Alex. However, I'm not sure if I made myself clear, or am totally missing the point (which I probably am). So here's an simplistic example (without other expenses):

1. I have a loan of $200K @ 10% and an offset facility which I start off with $20K. Net interest paid on $180K = $18k per annum

2. I receive rental income of $15K per year

3. Therefore tax offset = $18k-$15k= $3k per year

I have no idea what you think a tax offset is. With your example, at the end of the year you would only have $17k in the offset because you have to PAY the 18k while receiving the 15k.

4. I work and earn $50K a year. Tax on income = $8k

5. Total tax payable with offset = $8k-$3k(offset)= $5k per annum

You've lost me. $3k is a DEDUCTION, NOT a TAX REBATE. In your example (assuming nothing else) your taxable income is 47k (50k + 15k - 18k). The 3k is deducted against TAXABLE income, NOT tax payable (you wish).
Alex