IP offset account tax implications

[LynnH]

jimmijamz

As Pat said, if you put it in the LOC which has been set up for investment purposes and then subsequently withdraw $ for private purposes, then interest is not deductible on the funds used for private purposes.

However, if you put it in the offset a/c, there is no effect on deductibility of the interest. As per Pat's example: if you have $200,000 IP loan and $30,000 in the offset a/c, you will only be charged interest on $170,000. If you withdraw the $30,000 from the offset a/c for private use, then interest is charged on the full balance of the IP loan, as there are no longer any funds if the offset a/c. Note that there is no mixing of private and investment funds because the balance of the IP loan has not changed - just the amount of interest that has been charged.

If you have an LOC which is for private purposes only, then it is OK to put your salary into it, put private expenses on credit card and pay the card off each month. But you should keep IP expenses and private expenses completely separate, or things get very messy - and very expensive to sort out.

I hope this helps to clarify things.

Cheers
LynnH

 

[jamontoast]

As Pat said, if you put it in the LOC which has been set up for investment purposes and then subsequently withdraw $ for private purposes, then interest is not deductible on the funds used for private purposes.

hmm.... i may have not clarified it 110% with my broker. or he omitted such a *minor* detail.. hmmm.

Why don't they tell you this *@#&$(*&#.??? I doubt it's not like they don't know the tax complications.

 

[jamontoast]

If you have an LOC which is for private purposes only, then it is OK to put your salary into it, put private expenses on credit card and pay the card off each month. But you should keep IP expenses and private expenses completely separate, or things get very messy - and very expensive to sort out.

Thanks LynnH.
So if you were to have a LOC, how would you tell/ separate the interest on what is investment & what is private use on the same LOC?

ie. Thus can you put your salary into the LOC, use that to pay the investment expenses. Any additional funds for private use which you withdraw from the LOC, how would your accountant calculate the interest on the amount withdrawn month from month?

The only way then, is that should you ever put money into the LOC, then you can never take out anything for private uses or else there will be headaches?

 

[Pat]

Hi Jimmi,

You have a LOC (A) for personal withdrawals which is funded by all your income including salary, rent, interest, dividends etc. and then you have another LOC (B) for all investment property expenses which is funded by excess money in LOC (A) and drawings on the LOC (B).

So here you have your accounts seperated for easy recordings for you Accountant. Interest on LOC (A) is not deductible and Interest on LOC (B) is deductible.

Hope this helps

 

[redwing]

Thanks LynnH.
So if you were to have a LOC, how would you tell/ separate the interest on what is investment & what is private use on the same LOC?

ie. Thus can you put your salary into the LOC, use that to pay the investment expenses. Any additional funds for private use which you withdraw from the LOC, how would your accountant calculate the interest on the amount withdrawn month from month?

The only way then, is that should you ever put money into the LOC, then you can never take out anything for private uses or else there will be headaches?

Have a look at this free spreadsheet from Gatherumgoss have a look at "Determining the Tax Deductible Interest payments on a single loan with dual purpose"

 

[jamontoast]

You have a LOC (A) for personal withdrawals which is funded by all your income including salary, rent, interest, dividends etc. and then you have another LOC (B) for all investment property expenses which is funded by excess money in LOC (A) and drawings on the LOC (B).

Hope this helps

Let me try to rephrase this in newbie layman's terms... It's still a bit cloudy in my mind.


So from the one property you currently own. You take out 2 LOC. (is that possible?) LOC(B) is for investment LOC(A) is for personal.

LOC(B) starts off with 100k. (ie. to pay for deposit of new IP)
LOC(A) starts off with zero balance (for private)

LOC(A) gets all income (say 5k/ mth) and pay for any private use & credit card (say 2k/ mth). Therefore you got 3k left (or -3k balance)

LOC(B) use to pay IP expense & interests (say 1k/ mth)
- Thus 100k + 1k = 101k

Now you use LOC(A) -3k balance, and put into LOC(B).
Therefore LOC(B) is now 101k - 3k = 98k

Thus LOC(A) is back at zero. Each month as your income comes in (you should have more than enough to cover outgoings). It pays off the LOC (A) and any excess is funnelled immediately to LOC (B)

 

[jamontoast]

Have a look at this free spreadsheet from Gatherumgoss have a look at "Determining the Tax Deductible Interest payments on a single loan with dual purpose"

That's an interesting spreadsheet Redwing. So basically you have to be diligent in keeping records if you start using your LOC for dual purpose.

Can you take out 2 LOC from the one property?
Or if you have one LOC now, can you take another LOC from the same property instead of increasing the LOC for the dual purpose as described.

 

[ruroshin]

Let me try to rephrase this in newbie layman's terms... It's still a bit cloudy in my mind.


So from the one property you currently own. You take out 2 LOC. (is that possible?) LOC(B) is for investment LOC(A) is for personal.

LOC(B) starts off with 100k. (ie. to pay for deposit of new IP)
LOC(A) starts off with zero balance (for private)

LOC(A) gets all income (say 5k/ mth) and pay for any private use & credit card (say 2k/ mth). Therefore you got 3k left (or -3k balance)

LOC(B) use to pay IP expense & interests (say 1k/ mth)
- Thus 100k + 1k = 101k

Now you use LOC(A) -3k balance, and put into LOC(B).
Therefore LOC(B) is now 101k - 3k = 98k

Thus LOC(A) is back at zero. Each month as your income comes in (you should have more than enough to cover outgoings). It pays off the LOC (A) and any excess is funnelled immediately to LOC (B)

jimmijamz why don't you do this:

Use one property you currently own setup 1 LOC for investment purpose, use this to pay for all your IP expenses. Now Setup offset account attached to the LOC, put all your income into your offset account, pay all your private expense with your credit card, at the end of the month use balance in offset account to pay for credit card.

That way you don't touch your LOC at all unless its for IP expense and your offset account is reducing your LOC interest as well while keeping your private expenses seperate.

 

[jamontoast]

jimmijamz why don't you do this:
Use one property you currently own setup 1 LOC for investment purpose, use this to pay for all your IP expenses. Now Setup offset account attached to the LOC, put all your income into your offset account, pay all your private expense with your credit card, at the end of the month use balance in offset account to pay for credit card.
QUOTE]

I am going to ask a really stupid question...
but you can set up an offset against a LOC?

 

[LynnH]

I am going to ask a really stupid question...but you can set up an offset against a LOC?

Not with my bank - or, at least, last time I checked we couldn't.

But that doesn't mean that it's not possible ..... am sure one of our knowledgeable brokers can point you in the right direction with this. Qlds007? Rolf L? Rolf S? lukentel?

Cheers
LynnH

 

[Boyler_Room]

Lines of Credit don't have offset accounts attached to them as a general rule. They're a similar beast.

If you want an offset account, generally you need to have a variable term loan, with the odd lender offering 100% offset accounts on fixed rate loans (eg Adelaide Bank, The Rock Building Society... BankWest offers 40%).

Generally you either have a line of credit or a variable loan with an offset account, so the scenario provided earlier about having an LOC with an offset isn't really within the realms of possibility, however, many SVR loans have redraw facilities which serve a similar purpose, but having a reducing limit if they are P&I.

 

[voigtstr]

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

I've got a 20K loc with ING. Are you suggesting that when I go to withdraw it (tranferring it to a transaction account with another bank so that it can be direct credited to the Lawyers trust account) that the bank can say, sorry mate... our credit is to crunchy, you cant have it. I dont think so, its already approved.

 

[Peter_Tersteeg]

I've got a 20K loc with ING. Are you suggesting that when I go to withdraw it (tranferring it to a transaction account with another bank so that it can be direct credited to the Lawyers trust account) that the bank can say, sorry mate... our credit is to crunchy, you cant have it. I dont think so, its already approved.

It's possible, but in the case of ING it's unlikely. ING started lending with a solid deposit base and a lot of funds under management. They're not as exposed to the credit crunch as most lenders. You'll probably see a lot of other lenders go under before ING.

 

[beekay]

Well I gave my accountant feedback and she's treating it as a LOC/loan. She's got no idea what an offset account is. She's really not interested in what I have to say. But that's ok, I'm used to older people ignoring me. I'll find someone else who knows =(.

Time for a new accountant.

edit: My accountant is providing me some info she was sent on what she can and can't deduct. I might chase the ATO myself and see what answer I get from them. I don't want to do anything illegal with my finances!

 

[Boyler_Room]

Well at least now you know, beekay! As we thought.

And on a side note, don't let people push you around or think they're better than you just because they're older. It doesn't always mean they know more about what you're trying to do/achieve etc.

Cheers
BR

 

[tdh78au]

beekay, I got my response back from the ATO in email today. I sent them a detailed text in contact us ==> email enquiry ... and this is what I get back:

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The Tax Office Personal Tax Email Enquiries service can only provide general information about a client's Personal Income Tax issues. When your enquiry is specific to your circumstances or relates to complex issues, we recommend you call the office on 13 28 61 between 8.00am and 6.00pm, Monday to Friday.

If you prefer, you may also write to the Tax Office for advice about your taxation obligations in your particular circumstances. Please include your Tax File Number (TFN), your full name (previous and new, if applicable), date of birth, your address (previous and new, if applicable), your signature, details of your request and your contact telephone number.

If you need to send a letter to the Tax Office, you can post it to the address shown on your most recent notice of assessment.

You can also find a list of Tax Office contacts on our Internet site at www.ato.gov.au by clicking the link "Contact us" on the bottom of the page.

If you need to contact the Tax Office please call the Personal Tax Infoline on 13 28 61 between 8.00am and 6.00pm, Monday to Friday.
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I've decided to move onto an accountant who does understand what an offset account is and not to pursue this any further with the ATO.