IP offset account tax implications

[tdh78au]

Hi folks,
long time reader first time poster.
I've just returned from a visit to my accountant ... and he's totally freaked me out.
This is why:
I have an investment property with an interest-only investment loan @ 80% LVR. There is an offset account attached to the IP loan. Am I able to put all my income (salary & rent) into the offset account without having any tax implications if I take it back out for personal expenses (holiday, travel, day to day bills, etc)? I paid off my PPOR loan couple of months back & hence have no bad debt (with clear uncumbered PPOR title to my name).
My accountant seems to think that I am not at liberty to use the IP loan offset account for personal expenses (please note that the offset account is actually a separate deposit account to my IP loan account).
Please help!
any links to ato site and/or rulings re: same would be really appreciated as well.

 

[Bill.L]

Hi TDH,

Get an better accountant, perhaps one that knows what they are talking about.

They are clearly wrong. You are not redrawing money from a loan, it is a separate account.

Your accountant either does not know what an offset account is, or does not know tax law. Either way, Why bother paying them???

There are several accountants who regularly post here, they seem to know their stuff.

bye

 

[poppy]

Have you ever deposited any funds from the loan account into the offset account? That is the only reason you could not use the offset account for personal expenses.

For example say you took a loan out against your PPOR and placed the funds in the offset account and then used those funds to buy an IP. But some of the loan funds were leftover in the offset account. Then you could not take money from the offset account for personal expenses with affecting the deductibility.

 

[BV]

Hi folks,
long time reader first time poster.
I've just returned from a visit to my accountant ... and he's totally freaked me out.
This is why:
I have an investment property with an interest-only investment loan @ 80% LVR. There is an offset account attached to the IP loan. Am I able to put all my income (salary & rent) into the offset account without having any tax implications if I take it back out for personal expenses (holiday, travel, day to day bills, etc)? I paid off my PPOR loan couple of months back & hence have no bad debt (with clear uncumbered PPOR title to my name).
My accountant seems to think that I am not at liberty to use the IP loan offset account for personal expenses (please note that the offset account is actually a separate deposit account to my IP loan account).
Please help!
any links to ato site and/or rulings re: same would be really appreciated as well.

Maybe he thinks you have a line of credit and not an offset account.
The offset account is simply a savings account which offsets the balance of the main loan and it does not change the loan balance so it will not have tax implications.
Cheers

 

[tdh78au]

hi Bill, poppy & BV
appreciate your responses.
To clarify, the offset account is purely just that ... an offset account against IP loan.
There's no transfer of funds from IP loan into offset (or vice versa for that matter).
I checked with 2 other accountants during the day today (accountants that couple of my property savvy mates goto). 1 of them agreed with my accountant & the other agreed with me.
I'm now stuck cause I don't have any 'bad debt' and earn a decent income ... which I would like to use to offset the IP loan to my benefit (& the tax office's since my loss is reduced & hence they get more tax).
I might drop an email to the ATO .... *gulp*

 

[BV]

hi Bill, poppy & BV
appreciate your responses.
To clarify, the offset account is purely just that ... an offset account against IP loan.
There's no transfer of funds from IP loan into offset (or vice versa for that matter).
I checked with 2 other accountants during the day today (accountants that couple of my property savvy mates goto). 1 of them agreed with my accountant & the other agreed with me.
I'm now stuck cause I don't have any 'bad debt' and earn a decent income ... which I would like to use to offset the IP loan to my benefit (& the tax office's since my loss is reduced & hence they get more tax).
I might drop an email to the ATO .... *gulp*

I wouldn't worry about talking to the ATO

This only shows that the accountants you've asked either were not interested to answer your question or did not understand the product.
Either way, I would not be using these guys for my tax return
and not because they don't tell me what I want to hear but because
they don't know how to do their job....

If you decide to contact the ATO hopefully you will get through to someone who knows what an offset account is
I've heard that if you call them you often get through to graduates out of Tafe or Uni with little knowledge and no experience....

Cheers

 

[Peter_Tersteeg]

I'd get a better accountant. This question has been asked and answered so many times that there's no doubt about it.

 

[Rolf Latham]

sack the accountant ............

A professional that doesnt know the diff between IO offset and LOC needs education.

ta
rolf

 

[devo76]

Its hard to get good help. I visited my accountant with a suggested refinance and loan setup just to check with him first. The look on his face told me i was waisting his time. I actually spent my half hour explaining the benifits of a LOC, offset a/c etc etc to him not vice versa.

I then rang the ato. " Not sure sir. Let me hand you to the person in charge"

Then he says" OOH not sure sir i will have one of our specialist ring you back"

Then they say " Not sure . maybe you should ask your accountant".

Crazy. If anyone knows a good accountant please let me know.

 

[Boyler_Room]

Agree with the sentiments above. If your accountant doesn't know the difference between an Offset account and a LOC then there is a serious problem and I'd be running away very fast... and taking my money with me.

You're clearly aware of what an offset is, judging by your posts. I'd consider paying the accountant who seemed to have a clue a visit (the one who "agreed with you") and giving the others a wide berth.

Cheers
BR

 

[Pat]

Hi,

Taxation Determination 1999/42 cemented the problems that Lines of Credit have with the tax deductibility of interest with a mix of investment and private use purposes. Some Accountants get a whiff of drawing money from an offset account and run to this TD and think that the interest isn't tax deductible on the amount you have taken for private purposes from the offset.

An offset account doesn't contravene this law and is essentially a savings account sitting next to your Loan.

Your initial Financing advice is correct, the Accountant needs to be told the truth.

 

[PrimeCommercial]

I'd suggest keeping any income derived from your IP (rent) separate from your personal savings other than that, get a new accountant.

I dont for a minute think that your accountant is bad or shonky but it does take some specialist knowledge to advise on IP's, he may be very good in other areas. As your paying him for advice on investing you would probably get much better value/advice from someone that has a lot of experience with investing

 

[Bill.L]

Hi,

Shady, I wouldn't even be bothered with that.

In an offset account situation, the account is separate from the loan, they have different account numbers. You also get a statement from the PM to show what the rental income is.

TDH,

It is simple, go to an accountant that knows the rules.

We use an offset account with P&I repayments for one of our IP loans. That account has a lot of money in it at present, and ALL income, from all sources is placed into it. This of course offsets the interest payable and therefore reduces the tax return.

If you put enough money into an offset, then you can turn a negative property into a positive one.

bye

 

[BV]

I'd suggest keeping any income derived from your IP (rent) separate from your personal savings

Shady

In an offset account it doesn't matter mixing income up and it's particularly so when the offset is linked to an IP as it is in this case.

There is no way in the world the ATO could argue that you are getting a tax advantage by putting the rent in the offset.

In fact the ATO is getting an advantage when you deposit your personal income into the IP offset and it can be argued that personal income /savings could work better for you if they were invested elsewhere and not left in an IP offset account.

For example the IP interest is tax deductible so depending on your tax bracket you will get 30% or more of it back.
Instead of leaving your savings in your IP offset and getting a saving of 6%
if in good times you had it invested in managed funds or shares
or gear with it to buy another IP you could get a much better return than the 6% you are saving now.

Right now though, I think leaving our money in an offset is a good option.

IMHO

Cheers

 

[PrimeCommercial]

I see where you guys are coming from but at a latter stage when/if you arrange a LOC, draw it down and stick it into the same offset account for a rainy day, you'll then run into all sorts of problems combining it with personal savings

 

[BV]

I see where you guys are coming from but at a latter stage when/if you arrange a LOC, draw it down and stick it into the same offset account for a rainy day, you'll then run into all sorts of problems combining it with personal savings

ahhhh now this is something you should never do
Mixing IP LOC and offset money can be very painful

Cheers

 

[Spectre]

we've just run across a situation where the nice girl at cba told my soon to be new client to put $245k cash into his investment line of credit to save interest 4 months ago.

I emailed his accountant, who has just freaked right out as (in his opinion) our guy has now lost that deduction entirely. Think hes even rung the bank to ask them what were they thinking and why didnt they do a variable with an offset.

Long and short of it is some accountants know, some dont.

 

[LynnH]

.... and don't take investment advice from 'the nice girl at the CBA' - or anyone who is not licensed to give the relevant taxation or investment advice.

Cheers
LynnH

 

[Peter_Tersteeg]

Unfortunately the bank staff most people meet in a branch or over the phone have very little clue about property investment (or property for that matter). They're usually the last people I'd take investment related advice from.

 

[tubs]

.... and don't take investment advice from 'the nice girl at the CBA' - or anyone who is not licensed to give the relevant taxation or investment advice.

Cheers
LynnH

Although in this case its the mortgage brokers who arent licensed to give this advice who know what's actually going on, and the accountant, who IS licensed who doesnt have a clue...