Line of Credit vs Offset Account

[Tasman]

I have an offset account attached to an IO loan.

The way I see it is when you spend money on IP expenses, your saving account balance goes down by that amount, and your interest bill goes up, thus the interest is a tax deduction - because the interest you are paying is on the IP's loan. So you aren't actually claiming a deduction for the interest on paying IP expenses, but instead its interest on the IP itself. Either way, it is a direct tax deduction, and either way you are maximising the claimable interest owed.

Hope that helps.
Luke

Hi Luke
Thanks for clarifying the IO loan/offset account usage.

In Rolfs earlier post he mentions that you could use the offset account for personal or IP expenses. I presume that this is on the understanding that when you establish the IO loan and matched offset savings account, you dedicate them to either personal or investment purposes only.

Alternatively, mixing personal and investment expenses from the offset saving would mean the IO-loan interest would need to be aportioned between private and investment usage. This could become quite messy to manage. Would the ATO allow interest deductablity claims under such a mixed useage of loan/offset account.

thanks

Tasman

 

[HHH]

not sure about that....

Hi Guys, just reading the last two posts on this thread and I don't believe what has been said is quite correct. (Calling for the experts to clarify please).

The extra interest you pay on your PPOR when you pay IP expenses out an offset account will NOT be deductible.

Bottome line is, you are being charged interest on a loan for your PPOR.

There are a number of threads on this forum discussing how to do what you want by using split loan. i.e. an offset account with either a LOC or standard variable with redraw facility. (I actually had to learn how this worked myself only recently)

Good Luck guys!

 

[HHH]

... my reply was assuming you are talking about an offset against your PPOR?

if you meant against and IP, then yes, the interest would be deductible.

I just didn't want to confuse anyone.

 

[mckennal]

Just to clarify my post, I was talking about an offset against an IP loan. If you have an offset against your PPOR, and use the offset to pay IP expenses then the extra interest won't be deductable (as HHH said).

Hope I didn't confuse anyone.

Oh, and as always, consult an accountant/qualified tax professional before making any decisions.

 

[Tasman]

Query advantages of IO loan + offset savings account

Hi Acey

Very true, LOC on IP isnt as much an issue as it is with PPOR

One can achieve a similar but clunkier result with a with decent Offset product you can have the same effect, 100 % offset against an Interest only loan.

A great example is where someone has low equity and needs a 95 % refinance to access funds for use in the future, the loc product wont go to that LVR but an I/O Offset acct may.

ta

rolf

Hi Rolf/forumites

This post appears to be suggesting that an IO loan with offset savings account could be good for IP purposes due to the number of adavantages an IO loan/Offset structure provides. The IO loan surplus (security equity) would be transferred into the Offset savings account for funding investment expenses.

What happens to the IO loan interest tax deductability on the loan portion transferred to the offset account? The transfer itself is not an IP expense, then when IP expenses are paid from your Offset savings account they do not incur any tax deductable interest charges!

thanks
Tasman

 

[Rolf Latham]

Hiya Tasman

In short, the deductability of interest where an IP loan is used with an offset is fine as long as the proceeds of the loan sitting in the offset are used for an expense that is deductible in nature.

Interest will only be charged on the net difference btwn the loan amount and the $ in the offset acct. In this regard this is the net balance, just as if you were using a LOC.

If you spend some of the $ in the offset acct the NET balance increases and therefore there is an increase in the amount of interest charged

For current deductability purposes Investment LOC and Offset models are exactly the same

ta
rolf

 

[Tasman]

I have an offset account attached to an IO loan.

The way I see it is when you spend money on IP expenses, your saving account balance goes down by that amount, and your interest bill goes up, thus the interest is a tax deduction - because the interest you are paying is on the IP's loan. So you aren't actually claiming a deduction for the interest on paying IP expenses, but instead its interest on the IP itself. Either way, it is a direct tax deduction, and either way you are maximising the claimable interest owed.

Hope that helps.
Luke

Hi Luke
Sorry to keep asking same question, I previously accepted your logic, however the Offset account is used to 'isolate' logical interest earnings on the savings by assigning/redirecting interest to the associated loan account. The tax office treats loans and lender linked offset savings accounts as separate accounts; ie, totally independant. Now your stating that you will claim interest expenses on investment loan funds transferred to an independant offset savings account. Surely that is asking for two total opposite treatments of offset accounts by the ATO.

Tasman

 

[Tasman]

Hi Rolf
Thanks for clarifying deductability of IP loan interest expenses incurred via a linked offset savings account. It appears that offset accounts are very versitile and can be used in different modes depending upon circumstances. One to indirectly earn non taxable interest income, or stated otherwise simply reduce non deductable interest. Second senario to make funds available for IP expenses with a linked loan interest tax deductablility.

thanks
Tasman

 

[mckennal]

Hi Luke
Now your stating that you will claim interest expenses on investment loan funds transferred to an independant offset savings account.

Tasman

Hmm... having trouble understanding exactly what you are saying... but I don't seem to recall stating I will claim interest expenses they way you describe. You cannot claim a deduction on interest your havn't actually paid. I don't recall stating I will transfer funds from my loan to an offset savings account, but lets say you do, then you are correct, you cannot claim the interest on the "missing funds" from the loan account, because it will be directly offset by the funds now in the savings account. Always look to the "purpose of the loan" (and the interest payable on that loan) when working out what is a deduction and what is not.

Hope that wasn't too confusing. BTW, I certainly am not an acct, so don't take my word for it

 

[NormH]

Hi all

Rolf if you park rental income etc into your PPOR LOC or OFFSET a/c then the IP loan would capitalise.

Is one able to do that now.

regards
BC

BC hi,
this is still in limbo, the High Court heard the case last November and their decision is not expected until sometime this month.

But what Rolf was suggesting is correct, the only thing that you need do is to ensure the bank (for loan payments) draws interest only from your PPOR offset account and it can pull the capital (assuming it is a P&I and not an I only loan) from a LOC or offset account that is attached to your IP. All monies are going into you PPOR to reduce the non-deductable debt.

Of course you could, guess that the ATO will lose the case, have the bank pull all monies out of the PI offset account and then when the High Court hands down its decision just place a claim for the capitalised interest that you have not yet claimed on your tax forms.

The worst case is you are no worse off, the best case is you get some extra money back from the tax man.

Norman