Loan Contamination

When i set up my account with NAB. They do this automatically

1. Loan Account and
1. Offset 100% account.

Have no idea what to do then.. All the extra equity is in My Offset account including my salary + other expenses.

This is the setup that NAB did for me when i move from CBA...
Is the loan for a PPOR? If so, there's not a problem.

If your loan account includes the funds you borrowed to purchase, plus the extra equity you've drawn, then you're contaminated.
 
This is what the Bank do. Why would they do that..... If they know it will cause a problem!
Because they have no knowledge of, or interest in, your taxation affairs. You have to be proactive and tell them how you want it set up.
 
Because they have no knowledge of, or interest in, your taxation affairs. You have to be proactive and tell them how you want it set up.
So are you saying that income should not go to the 100% offset account ? What's the purpose of having an offset account if it need to be separated ?

I still don't understand! To be preciesed say My property is 500k so the loan set up is the following:

1. Loan account 400k Balance of 500k (assuming 20% deposit)

2. Offset account say 10k (e.g. some saving) and my salary comes here to reduce the Interest. Also my rent income, and interest with other property expenses is deduct straight from this account
 
When i set up my account with NAB. They do this automatically

1. Loan Account and
1. Offset 100% account.

Have no idea what to do then.. All the extra equity is in My Offset account including my salary + other expenses.

This is the setup that NAB did for me when i move from CBA...
Your loan is contaminated. You need to confess to your accountant so he can work out how much of the interest to claim. See Domjan case.
 
So are you saying that income should not go to the 100% offset account ? What's the purpose of having an offset account if it need to be separated ?

I still don't understand!
You have borrowed money and plonked it together with savings. Interest is only deduction on money borrowed to invest.
 
You have borrowed money and plonked it together with savings. Interest is only deduction on money borrowed to invest.
Hi Terry,

So you're saying that No income should go to my offset account. It should be separate ?
please see this scenarios:
To be precise say My property is 500k so the loan set up is the following:

1. Loan account 400k Balance of 500k (assuming 20% deposit)

2. Offset account say 10k (e.g. some saving) and my salary comes here to reduce the Interest. Also my rent income, and interest with other property expenses is deduct straight from this account
 
So are you saying that income should not go to the 100% offset account ? What's the purpose of having an offset account if it need to be separated ?

I still don't understand! To be preciesed say My property is 500k so the loan set up is the following:

1. Loan account 400k Balance of 500k (assuming 20% deposit)

2. Offset account say 10k (e.g. some saving) and my salary comes here to reduce the Interest. Also my rent income, and interest with other property expenses is deduct straight from this account
The offset's not the problem, it's combining your original purchase loan with the increased equity that you've drawn, into one loan account, that's the problem.

e.g. Buy for $400K, borrowing $320K > $320K loan, all interest deductible

Property goes up to $500K, can borrow 80% or $400K > if you draw out the $80K extra, that portion's interest is NOT deductible if you draw as cash (only if you use as deposit on another IP, for example)

If you draw it as cash, you should have:

Loan 1: $320K - interest deductible
Loan 2: $80K - interest not deductible

If you instead have one loan for $400K, you have a contaminated loan.
 
The offset's not the problem, it's combining your original purchase loan with the increased equity that you've drawn, into one loan account, that's the problem.

e.g. Buy for $400K, borrowing $320K > $320K loan, all interest deductible

Property goes up to $500K, can borrow 80% or $400K > if you draw out the $80K extra, that portion's interest is NOT deductible if you draw as cash (only if you use as deposit on another IP, for example

If you draw it as cash, you should have

Loan 1: $320K - interest deductible
Loan 2: $80K - interest not deductible

If you instead have one loan for $400K, you have a contaminated loan.
But if you withdraw and use it for another IP it should be fine right ? I have withdrawn it and buy another 2 IP.... However i do have alot more sitting in the offset account, but have not use it at all. Just sitting there
 
Hi Terry,

So you're saying that No income should go to my offset account. It should be separate ?
please see this scenarios:
To be precise say My property is 500k so the loan set up is the following:

1. Loan account 400k Balance of 500k (assuming 20% deposit)

2. Offset account say 10k (e.g. some saving) and my salary comes here to reduce the Interest. Also my rent income, and interest with other property expenses is deduct straight from this account
I am saying no borrowed money should be going into your offset account.

But NAB are not as flexible as most, so if you must borrow with them then you might be able to set up a separate account to receive the borrowed money, but at no time should any other cash go into this account - And I am not endorsing this method, you should seek your own tax advice on this.
 
But if you withdraw and use it for another IP it should be fine right ? I have withdrawn it and buy another 2 IP.... However i do have alot more sitting in the offset account, but have not use it at all. Just sitting there
If it passed through the offset, and mixed with other cash, then it won't be deductible. You'd have to take the extra you've drawn down, and transfer it directly to the vendor of an IP, in order for the "extra" to have deductible interest.

Even in that situation, you should have separate loan accounts, because otherwise, selling IP1 will complicate things.

Best to keep one loan account for each IP, and separate loan accounts for private purposes / cash.
 
Think of it this way

You have 400ml of Milk and have say 10mil of orange juice. If you take out some of the milk and put it into your orange juice account, say 10ml of milk then later when you want to use your 10ml of orange juice how can you withdraw it? If you withdraw 10ml you will have 50% orange juice and 50% milk.
 
If it passed through the offset, and mixed with other cash, then it won't be deductible. You'd have to take the extra you've drawn down, and transfer it directly to the vendor of an IP, in order for the "extra" to have deductible interest.

Even in that situation, you should have separate loan accounts, because otherwise, selling IP1 will complicate things.

Best to keep one loan account for each IP, and separate loan accounts for private purposes / cash.
The equity is used for 10% deposit for Off the plan property... How does that work ?
 
The equity is used for 10% deposit for Off the plan property... How does that work ?
If it went directly from the loan account to the OTP vendor, without passing through the offset, then you probably don't have a problem.

If it went into the offset first, however, you do have a problem.
 
If it went directly from the loan account to the OTP vendor, without passing through the offset, then you probably don't have a problem.

If it went into the offset first, however, you do have a problem.
what if the top up was transferred to the offset upon settlement and then immediately moved into the redraw acct before any salary/personal savings is deposited into the offset? Would this still be contamination?
 
what if the top up was transferred to the offset upon settlement and then immediately moved into the redraw acct before any salary/personal savings is deposited into the offset? Would this still be contamination?
I am not an expert, so hopefully Terry W can confirm, but if there were no other funds in the offset account, then I don't think there'd be a contamination issue.

But what do you mean about moved into a redraw? That sounds more problematic than passing through the offset.

What was the purpose of the loan with a redraw facility? Deductible or not? When you redraw the funds, what are they going to be used for?
 
That's exactly what happen. Move to a new Bank from CBA.. Valuation come up NAB put whatever extra on top of the 20% into my Offset account.

Bank should be liable to this, we're just regular person who have no knowledge of Taxation nor Accountant. Also fairly new to investment game! So BS if suddenly we're into trouble for something that we're not aware!
 
I am not an expert, so hopefully Terry W can confirm, but if there were no other funds in the offset account, then I don't think there'd be a contamination issue.

But what do you mean about moved into a redraw? That sounds more problematic than passing through the offset.

What was the purpose of the loan with a redraw facility? Deductible or not? When you redraw the funds, what are they going to be used for?
well the purpose was just to park the extra money borrowed into the redraw loan (IP not PPOR).

The intention was to use them for future IP purchases? I have not spent this equity release yet.

Story is:

Before refinance(1st May)

Bank: Westpac
IP1 Loan Balance: $500k
IP2 Loan Balance: $500k


After refinance (1st May)

Bank: NAB
IP1 Loan Balance: $630k
IP2 Loan Balance: $650k

All settlement excess was dumped into Offset 1 Linked to IP1 Loan: $280k

As soon this was settled, I immediately transferred
-$130k into IP1 Loan Redraw
-$150k into IP2 Loan Redraw

Which ultimately brings my Offset acct balance to $0.

Then i started putting in my salary/savings into the offset.
 
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