LOC vs Loan Offset

[Dingus]

Hi all,

There has been a bit of discussion on this however I just want to clarify for tax treatment.

I am looking to purchase another IP soon and have refinanced my current IP to unlock some equity so I can use these funds for a deposit.

Lets say I have $100k that I am drawing down. What I plan to do is draw these funds down and to have them sit in offset against the loan. No other personal funds will be deposited in offset nor will I have rent and other income in that account. The funds in offset will contain only the drawn down equity funds.

Once I see a property that fits my criteria I will then pay (directly from offset) to make the deposit (I have checked with the bank and this is possible). Given I have not contaminated the funds with personal savings, nor have washed them through a transaction account, I believe I am then able to claim the interest in my tax return.

I could actually choose to pay back the excess funds into the loan and redraw it, however I just wanted to confirm that using the offset in the above manner will be fine for tax purposes, as from my view makes no difference between a LOC or Redraw.

Cheers guys,
Dingus

 

[Terry_w]

My view is that this is dangerous.

 

[Peter_Tersteeg]

Strictly speaking I think what you're planning is okay. If the offset account is never used for anything other investment purposes it should be fine.

In practice though I'd discourage it. It's way too easy to muck something up and compromise the detectability of the loan. If you're audited, the ATO may not find anything, but it's going to make them want to go looking and that's not a pleasant process.

You're best off to try keep things simple. Leave excess funds in the redraw facility. Offset and other savings accounts are for your own money, not the banks.

 

[Dingus]

Thanks Peter. The only reason I would keep in offset is that it gives immediate access to the funds.

I am quite disciplined and detailed when it comes to segregating financial matters (I am an accountant by trade), so the risk in contaminating funds are low to non-existent.

But good to know that it might attract the ATO to come sniffing around...

 

[Peter_Tersteeg]

Dingus as an accountant you're far more qualified in dealing with the ATO than I ever will be.

My feeling is that using an offset account in this manner could just be waiving a red flag at them, even when you're doing everything right.

 

[Neptune]

Peter, why do you say that having borrowed funds in an offset account might raise a red flag to ATO?

 

[Terry_w]

Peter, why do you say that having borrowed funds in an offset account might raise a red flag to ATO?

borrowing and investing - no direct connection.
Look at Domjan's case.

 

[Dingus]

Dingus as an accountant you're far more qualified in dealing with the ATO than I ever will be.

My feeling is that using an offset account in this manner could just be waiving a red flag at them, even when you're doing everything right.

I am a qualified accountant but in Banking and Finance so unfortunately I have limited dealings with the ATO, hence my initial question. I think kept clean of any other personal funds, it would be easy to maintain the nexus between the offset funds balance with the refinanced loans.

I think in any event, I will play it safe and deposit the funds back against the loan and use the redraw facility to draw out a deposit when needed.

 

[Rolf Latham]

borrowing and investing - no direct connection.
Look at Domjan's case.

loooooooooooong straw

The issue with Domjan was not the nexus, but the mixing of other, personal,not borrowed funds.

Its was impossible for the borrower to define what specific funds were used from the offset for her share purchases.

In my view, the mixed funds is the core issue, not the offset account per se.

Id suggest dont blame the product, but its utilisation.

Precisely the same ruling would apply with a LOC or redraw loan if the borrower was salary crediting to the loc.........

ta
rolf

 

[Terry_w]

Yes, mixing is certainly an issue and was so for Domjan.

I would still advise clients to avoid the parking bit too as once it is parked it is technically no longer borrowed money once it hits an offset. However it is not always possible, especially with small increases.

 

[Neptune]

Is there at timeframe for how long it is parked where it is technically no longer considered borrowed money? When you get an equity loan with a linked offset account the bank will draw it down and deposit it into the offset loan (at least they did in my case). What is an acceptable timeframe to leave it there before paying back any unused amount into the loan?

 

[Rolf Latham]

What is an acceptable timeframe to leave it there before paying back any unused amount into the loan?

Ask the ATO for a Private Binding Ruling ..................

its the only wayyou can be sure if you have a concern

If you believe that once borrowed money hits a "suspense" account is no longer borrowed funds, the timing would usually be irrelevant.

ta
rolf

 

[Terry_w]

Is there at timeframe for how long it is parked where it is technically no longer considered borrowed money? When you get an equity loan with a linked offset account the bank will draw it down and deposit it into the offset loan (at least they did in my case). What is an acceptable timeframe to leave it there before paying back any unused amount into the loan?

paying into a loan doesn't really affect things it is the withdrawal that effects.

If you withdraw and park it there should be no extra interest incurred. You then place it back in and withdraw it from the loan = new borrowings. What this withdrawal is used for will determine dedutibility.

 

[Colin Rice]

Money in redraw is back in the banks control, that is they can block access at their discretion. Not common but seen it happen.

Also seen accounts closed down as the system thinks the loan is paid out and also seen accounts go into arrears as bank staff do careless disbursements when distributing funds then have the cheek to say that you told them to do it!

Surely funds in a dedicated offset with no contamination would be deemed as reasonable if it is clear no tax scheme was intended but quite the opposite?

 

[redwing]

Lets say I have $100k that I am drawing down. What I plan to do is draw these funds down and to have them sit in offset against the loan. No other personal funds will be deposited in offset nor will I have rent and other income in that account. The funds in offset will contain only the drawn down equity funds.

Won't there be a difference in rate

i,e If you draw down on your equity taken out as a LOC you start paying interest at the LOC rate which is normally higher

Putting it into an 100% Offset against the loan would be at another (lower) rate wouldn't it

Why not just leave it in the LOC where it costs you nothing until drawn upon?