Offset Account linked to IP loan, usage

[Tasman]

Hello all,
I am aware of many posts in regards to offset accounts but I don't think they cover the below senario specifically.

I am planning ahead when my PPOR loan will be repaid, on the parking of personal savings in an offset savings account linked to Investment Loan. However I will have topped up the offset account with a significant drawdown on IP equity. So a situation will arise where I will have say 70% investment funds in the offset account and 30% private funds.

When I use the parked IP funds in offset account for investment purposes, I am a little concerned that the ATO may state that the IP expenditure from the offset account cannot be directly linked to the usage of the loan funds, due to the mix of funds in the offset account. The ATO may insist (if audited) on proportioning the expenses to the IP loan and private funds according to the mix in the offset account.

Thanks for any viewpoints and opinions in this regards

Tasman

 

[Patosan]

G'day Tasman,

I'm not sure that I've got the picture quite right :
1. You'll draw down IP equity, presumably via a LOC or redrawable loan.
2. Park (invest for ATO) these funds in an IP loan offset acc.
3. You'll keep personal savings in the same IP loan offset acc.

Drawn down interest should not be affected by whatever level of savings you mix in the offset acc. The drawn down funds are stable, not growing, so are easy to track. If you use 10k of it for IP purpose then remaining is simply minus 10k.
Offset acc costs, if any, should be claimable since they would most likely be incurred regardless of funds source.

This may indeed not have been covered before since few people would draw down funds with the intention to put into an offset acc. It is this very point that the ATO may question, as I do, why would you want to do it ?
If your IP equity is drawable then why bother drawing it prematurely unless you thought there was a chance of losing the ability to draw in the near future ?

I've probably got your question all wrong and I'm not a tax professional either, so please forgive any goofs.

 

[Tasman]

Hi Patosan,
Thanks for reply.
The reason I park a drawdown on IP loan into offset is when you wish to draw increased funds from non line of credit type loan, you must fully withdraw the full approved loan amount from the loan account (you could redeposit excess funds and then redraw when needed, however I prefer the offset account method). If you are just setting up some funds for future IP expenses, then an offset account is suitable for holding the funds, with interest not realised until you actually spend the funds in the offset account.

There are no significant fees associated with the offset account, so no questions in this regard and the ATO.

I think the normal focus on offset accounts is they do not affect the principle amount owed in the linked loan account. This is fine when you fully draw a loan say to purchase an IP. The purpose of the loan funds is established, and any private offset funds help to reduce the interest incurred on the loan.

Parking loan funds in offset account is not invested (ATO and my viewpoint) until spent on an investment, from my understanding of the use of the funds .

Cheers
Tasman

 

[Patosan]

... when you wish to draw increased funds from non line of credit type loan, you must fully withdraw the full approved loan amount from the loan account ...

The loans I've had and now have don't have such a restriction on draws, the CBA only asks for a min size and in multiples of a certain amount. Example only : min 1,000 and in multiples of 500. I'd check up on this point with your current or intended lender, as it seems strange to me.

I guess I should ask what you mean by "non LOC type" loans. Mine currently are not LOC but redrawable and as mentioned above are flexible. Perhaps an alternative would be to get your loan(s) made redrawable or move to a lender that will do it for you.

Good luck

 

[WillG]

Parking loan funds in offset account is not invested (ATO and my viewpoint) until spent on an investment, from my understanding of the use of the funds .

You have probably hit the nail on the head here. Parking the money in the offset account may mean that the interest incurred on the IP loan for the amount in the offset acount cannot be claimed (because it isn't directly generating any income) - this however won't be a problem as long as you leave the money in the offset account. When you withdraw the money to fund further investments, you 'may not' be seen to be drawing down on a loan to finance the investment thus cannot claim interest.

Have you called the ATO to discuss the scenario ?

 

[Tasman]

Hi Willg,
Money drawn from loan into offset will not incur any interest expenses, that is the function of 100% offset facility on savings account.

Primarily my concern is as you comment -

"When you withdraw the money to fund further investments, you 'may not' be seen to be drawing down on a loan to finance the investment thus cannot claim interest."

I think the ATO would recognise the expenditure from the loan account if only loan funds were in the offset account.

However, I am pondering if ATO will recognise expenses paid from an offset account holding loan funds and private funds are an expenditure from the loan account. I believe ATO would expect proportioning the expenditure of loan and private savings according to the mix ratio.

Patosan,
I have checked with my lender, and yes redraw would be quite a viable option in paying IP bills direct from the loan account. BPAY, Direct debits/tranfers to creditors account and cheques can be made from loan account. Also with no practical minimum amounts applying to redraw. This along with offset account makes it very a flexible loan product. So I could problably go with the senario of paying IP expenses by redraw and sit private savings in offset account.

The ATO office is closed until 3rd January and I was seeking opinions from investors on how they manage accounts.

Thanks
Tasman