IP offset account tax implications
- Thread starter tdh78au
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If you arrange a LOC, why not just leave the balance of the LOC at zero for a rainy day. I wouldnt be moving the money out of it and putting it in an offset. (for a start the LOC interest rate is probably higher than your mortgage interest rate)
Its done because once the LOC has been approved doesnt mean that when you want the funds they will be available. For instance...you have a LOC off $100k approved and then 18months later when you need to draw on it, the bank decides to re-asses the situation and then reduces/cancels the LOC. 50% of the reason to have the funds available is when things get tough and thats generally when the bank will baulk at giving you any money
TR 2000/2 paragraph 40
The Commissioner admits that an offset account redraw does not affet the original loan principle in his very argument that LOC redraws are not "notional offset account" amounts.
I fail to see any room for discussion here in the absence of any ruling to the contrary ???
Cheers,
Rob
The Commissioner admits that an offset account redraw does not affet the original loan principle in his very argument that LOC redraws are not "notional offset account" amounts.
I fail to see any room for discussion here in the absence of any ruling to the contrary ???
Cheers,
Rob
What are you on about?
I fail to see any relenvance here other than the fact the words 'LOC' & 'Offset account' has been mentioned
firstly ... thanks to everyone who has responded. It's great to see such a lively discussion within a day
going back to case 1 / my original post:
Pat (post 11), thanks for highlighting the TD 1999/42. It helps to understand where some of the accountants are coming from. I reckon my current accountant is probably going off this TD as well.
Bill.L, regarding post 13, you have mentioned that you deposit all your income into the offset account. I assume you also use the same offset account for personal day-to-day expenditure?
I did a search on the ATO website and came across the following two taxation rulings: TR 98/22 & TR 93/6
TR 98/22 probably does not apply in this case .... because here the ATO is talking about split & linked accounts. Whereas in my case it's a dual account situation.
TR 93/6 does talk about dual accounts and also mentions that it's acceptable. Question (v) in the same ruling also answers the following "What happens if the interest is deductible?". However, TR 93/6 is more focused on the (non-existent) income from offset accounts & tax/FBT implications for same. Sadly it doesn't reflect on the treatment of deductible interest against the varying balance of IP loan (which would be the case when the offset is used for personal expenses).
Upon everyone's advise here, I decided to actually drop an email to ATO in writing (rather than call). It's been a day now and still no response from them. Will let you know if I hear back.
going back to case 1 / my original post:
Pat (post 11), thanks for highlighting the TD 1999/42. It helps to understand where some of the accountants are coming from. I reckon my current accountant is probably going off this TD as well.
Bill.L, regarding post 13, you have mentioned that you deposit all your income into the offset account. I assume you also use the same offset account for personal day-to-day expenditure?
I did a search on the ATO website and came across the following two taxation rulings: TR 98/22 & TR 93/6
TR 98/22 probably does not apply in this case .... because here the ATO is talking about split & linked accounts. Whereas in my case it's a dual account situation.
TR 93/6 does talk about dual accounts and also mentions that it's acceptable. Question (v) in the same ruling also answers the following "What happens if the interest is deductible?". However, TR 93/6 is more focused on the (non-existent) income from offset accounts & tax/FBT implications for same. Sadly it doesn't reflect on the treatment of deductible interest against the varying balance of IP loan (which would be the case when the offset is used for personal expenses).
Upon everyone's advise here, I decided to actually drop an email to ATO in writing (rather than call). It's been a day now and still no response from them. Will let you know if I hear back.
Hi folks,
I just saw my accountant today and she told me the exact same thing!!! She said not to put anymore money in the offset as she reckons this will affect whether my interest can or can't be deducted.
I'm in a similar situation, I have a IO loan and an offset account where I park my wage and draw on it for daily expenses (well since I settled in June 2008).
She also gave an example of one of her clients not being able to claim interest on 3 of his properties. I'm trying to seek clarification here and if anyone has the appropriate tax laws, I'd love to show her.
Regards,
beekay.
I just saw my accountant today and she told me the exact same thing!!! She said not to put anymore money in the offset as she reckons this will affect whether my interest can or can't be deducted.
I'm in a similar situation, I have a IO loan and an offset account where I park my wage and draw on it for daily expenses (well since I settled in June 2008).
She also gave an example of one of her clients not being able to claim interest on 3 of his properties. I'm trying to seek clarification here and if anyone has the appropriate tax laws, I'd love to show her.
Regards,
beekay.
beekay,
Get a new accountant, as has been suggested to others in this thread. If we were talking about a LOC, then your accountant would be on the money, but an offset account is simply a savings account that is completely separate from your loan.
It does mean that you'll likely have a reduced tax deduction as you won't be paying as much in interest but it does NOT have an impact on your interest being deductible.
Reall,y it's a simple thing. I don't understand how someone in the industry could get something so wrong. I feel for all the property investors (negatively gearing in particular) not getting their full deductions because of poor tax advice from so-called "experts".
Cheers
BR
Get a new accountant, as has been suggested to others in this thread. If we were talking about a LOC, then your accountant would be on the money, but an offset account is simply a savings account that is completely separate from your loan.
It does mean that you'll likely have a reduced tax deduction as you won't be paying as much in interest but it does NOT have an impact on your interest being deductible.
Reall,y it's a simple thing. I don't understand how someone in the industry could get something so wrong. I feel for all the property investors (negatively gearing in particular) not getting their full deductions because of poor tax advice from so-called "experts".
Cheers
BR
thanks for your replies guys, before I ditch my current accountant and goto one that knows, I'd like some info I can show my current accountant so at least she gets the feedback that she's doing something wrong.
Is there any page on the Taxation laws page that clarifies this? I looked at the previous postings, but they don't seem to hit the nail on the head, or I could be wrong.
Is there any page on the Taxation laws page that clarifies this? I looked at the previous postings, but they don't seem to hit the nail on the head, or I could be wrong.
beekay,
As I said in my previous post, an offset account is a savings account, just as any other savings account is a savings account. Would your interest NOT be deductible if you put all your income (including investment income) into your everyday savings account (which is just what an offset account is... at most banks)?
Your accountant has confused a LOC with an offset account. They are two very separate and different things. An offset account is simply a savings account. A LOC is very, very different... and is actually what your accountant is talking about.
Ask them if they know what an offset account is and how it works. That should give you enough information.
Cheers
BR
As I said in my previous post, an offset account is a savings account, just as any other savings account is a savings account. Would your interest NOT be deductible if you put all your income (including investment income) into your everyday savings account (which is just what an offset account is... at most banks)?
Your accountant has confused a LOC with an offset account. They are two very separate and different things. An offset account is simply a savings account. A LOC is very, very different... and is actually what your accountant is talking about.
Ask them if they know what an offset account is and how it works. That should give you enough information.
Cheers
BR
Hi Beekay,
As Rob has mentioned para 40 of TR 2000/2 clearly states that an offset facility doesn't effect the tax deductibility of the original loan amount.
Example $200,000 I/P Loan, you pay an extra $30,000 into an Offset account linked to this loan. 6 Months later you redraw that $30,000 from the offset facility for a trip to the Olympics to see Steve Hooker win a Gold Medal in the Pole Vault. The interest on the $200,000 will remain fully deductible.
However if you paid $30,000 off a LOC attached to an I/P and then redrew that amount 6 months later to see the flying red doormat strike Gold on the Pole Vault then the interest on that $30,000 redraw would be seen as a new private loan and the interest would not be deductible.
Hope this helps
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My bet is you won't hear back from them for at least 28 days, if at all so don't hold your breath. Then they will just refer you to relevant legislation and not give you a straight answer.
I'm sure there is a better ruling to be referring to.
TR 2000/2 paragraph 40
The Commissioner admits that an offset account redraw does not affect the original loan principle in his very argument that LOC redraws are not "notional offset account" amounts.
This just states that the commissioner agrees that an offset account is not a LOC and that they are different animals. It also says that an offset account does not affect the original loan principle.
****EDIT
mmmm, just thinkning about those 6 words.....'does not affect the original loan principle'. Maybe it is the correct ruling
appologies Rob.
I reckon if you put together "TR 2000/2 paragraph 40" with "TR 93/6" and "TR 98/22"; that's enough for any savvy investor (+ ATO) to deduce that IP loan + offset arrangement is legit.
Beekay, if ure serious about providing feedback to your accountant, then perhaps you run these rulings past her?
Beekay, if ure serious about providing feedback to your accountant, then perhaps you run these rulings past her?
I have a question, and i'm not an accountant...
I'm confused. >_<.
Why do people advocate, put all ur income into the LOC or Offset. And then use the LOC to pay for all your IP's expenses and all your credit card debit? Isn't the credit card debt your personal expenses? How do you seperate the interest on what was for investment purposes and what is for private use?
This i understand.
I'm confused. >_<.
Why do people advocate, put all ur income into the LOC or Offset. And then use the LOC to pay for all your IP's expenses and all your credit card debit? Isn't the credit card debt your personal expenses? How do you seperate the interest on what was for investment purposes and what is for private use?
