Offset Account & Tax Deductibility

D

dajackal

Hi all, I was hoping you can advise on whether the following scenarios would muddle tax deductibility or not.

Currently I have an offset account against an IP. I instructed my Propery Managers to deposit rent money into the offset account. I instructed my lenders to withdraw interest payments from the offset account. I deposit my own funds in there every paycheck to make up the difference between the two. Basically I'm using it as an transaction account as I was previously paying down non-deductible debt elsewhere.

However, I no longer have any non-deductible debt and was thinking to get my salary directly deposited into the offset account and using the funds there for personal expenses. Purpose being to minimise interest payments as I'm massively negatively geared. Will this affect tax deductibility?

Additionally, in the next couple of years my plan is to turn the IP with the offset account into my PPOR. If I continue to get my salary paid into the offset account and using the funds for personal expenses, will that affect tax deductibility?

Cheers,
J
 
dajackal said:
Hi all, I was hoping you can advise on whether the following scenarios would muddle tax deductibility or not.

Currently I have an offset account against an IP. I instructed my Propery Managers to deposit rent money into the offset account. I instructed my lenders to withdraw interest payments from the offset account. I deposit my own funds in there every paycheck to make up the difference between the two. Basically I'm using it as an transaction account as I was previously paying down non-deductible debt elsewhere.

However, I no longer have any non-deductible debt and was thinking to get my salary directly deposited into the offset account and using the funds there for personal expenses. Purpose being to minimise interest payments as I'm massively negatively geared. Will this affect tax deductibility?

Additionally, in the next couple of years my plan is to turn the IP with the offset account into my PPOR. If I continue to get my salary paid into the offset account and using the funds for personal expenses, will that affect tax deductibility?

Cheers,
J
Click to expand...


You need to ask yourself, if you were to withdraw all the funds from your offset account to buy a PPOR or some other asset where the interest thereon would be non deductible (had you otherwise borrowed to buy it) would you still get a deduction for the full interest charge on your IP loan ?...the answer is yes.

What you do with funds in your offset account is of no concern to the ATO any more than if you used funds from a term deposit. Funds held in an offset account act to reduce the interest cost you would otherwise be able to deduct. You are not increasing borrowings in your IP loan by removal of those funds.

It's different if you redraw from your IP loan to buy personal/domestic use items , then you would have a problem.
 
ozmale42 said:
You need to ask yourself, if you were to withdraw all the funds from your offset account to buy a PPOR or some other asset where the interest thereon would be non deductible (had you otherwise borrowed to buy it) would you still get a deduction for the full interest charge on your IP loan ?...the answer is yes.

What you do with funds in your offset account is of no concern to the ATO any more than if you used funds from a term deposit. Funds held in an offset account act to reduce the interest cost you would otherwise be able to deduct. You are not increasing borrowings in your IP loan by removal of those funds.

It's different if you redraw from your IP loan to buy personal/domestic use items , then you would have a problem.
Click to expand...

As long as it is a true offset account there should be no tax issues.
 
dajackal said:
However, I no longer have any non-deductible debt and was thinking to get my salary directly deposited into the offset account and using the funds there for personal expenses. Purpose being to minimise interest payments as I'm massively negatively geared. Will this affect tax deductibility?
Click to expand...

Sounds like a pretty good plan. There doesn't appear to be any nasty tax implications here. If you ever increase the investment loan, leave funds from that investment loan in the loans redraw facility (don't mix borrowed funds with personal funds in the offset).

dajackal said:
Additionally, in the next couple of years my plan is to turn the IP with the offset account into my PPOR. If I continue to get my salary paid into the offset account and using the funds for personal expenses, will that affect tax deductibility?
Click to expand...

Again this looks fine and is good forward planning. My questions would be around how your existing PPOR is structured and what you'll do there when the time comes to move (assuming you have an unencumbered PPOR at the moment). Good structuring on any loans there might give you some substantial benefits later when you move.
 
Terryw said:
As long as it is a true offset account there should be no tax issues.
Click to expand...

Whats the difference between a true one and a...(false?) one ?

My point is, provided he doesn't refinance or redraw on the IP loan to finance a non deductible activity he should be fine. If he uses his own credit funds from any account (incl offset) to buy groceries it will have no effect on the deductibility of interest on the underlying IP loan

Yes, the net interest on the loan will increase by virtue of funds being moved out of the offset account, but 100% of it will still be deductible.
Cheers
 
thanks for the clarifications everyone! looks like this plan just got the green lighted.

for the record we don't have a unecumbered PPOR, but we've just recently joined the renter class for the first time (shock horror), and renting out our previous PPOR.

tl;dr offset accounts are godly..
 
ozmale42 said:
Whats the difference between a true one and a...(false?) one ?

My point is, provided he doesn't refinance or redraw on the IP loan to finance a non deductible activity he should be fine. If he uses his own credit funds from any account (incl offset) to buy groceries it will have no effect on the deductibility of interest on the underlying IP loan

Yes, the net interest on the loan will increase by virtue of funds being moved out of the offset account, but 100% of it will still be deductible.
Cheers
Click to expand...

Not all offset accounts reduce the interest calculation. Some will pay you interest like a savings account, then credit it against the interest on the loan. Technically you then need to pay tax on the interest from the savings account. Some lenders only offer a partial offset account where only a percentage of the balance counts against the loan.

Only deducting for investment purposes is fine, but it commits you to a single path. An offset account gives you more options and flexibility.
 
PT_Bear said:
Not all offset accounts reduce the interest calculation. Some will pay you interest like a savings account, then credit it against the interest on the loan. Technically you then need to pay tax on the interest from the savings account. Some lenders only offer a partial offset account where only a percentage of the balance counts against the loan.

Only deducting for investment purposes is fine, but it commits you to a single path. An offset account gives you more options and flexibility.
Click to expand...

Thanks for that....The ATO have accepted loan offset arrangements since 1993 I believe, so the issue must have been in the way the banks were marketing these products at the time, which really defeats the whole purpose and rationale of having an offset account.

Don't see any benefit whatsoever in the kind of offset account you describe especially if the interest is not credited at the same rate at which the interest is charged AND is separately assessable.
 
ozmale42 said:
Thanks for that....The ATO have accepted loan offset arrangements since 1993 I believe, so the issue must have been in the way the banks were marketing these products at the time, which really defeats the whole purpose and rationale of having an offset account.

Don't see any benefit whatsoever in the kind of offset account you describe especially if the interest is not credited at the same rate at which the interest is charged AND is separately assessable.
Click to expand...

You're not looking hard enough, (hint: the benefit for the bank not you)
 
Hi

I recently refinanced my loan. Just wondering what tax implications i may come across in this situation:

For example: Loan is 200g but 40g is equity available for redraw...so loan balance is sitting at 160g.

I am going to use the 40g via redraw to purchase a bit extra land alongside my property - i can redraw via internet banking to my offset account.

So if land cost 30g and i used redraw to get 30g from loan to offset account and then paid the landowner for the land from my offset account will there be tax implications? Or?
 
Ploengy said:
Hi

I recently refinanced my loan. Just wondering what tax implications i may come across in this situation:

For example: Loan is 200g but 40g is equity available for redraw...so loan balance is sitting at 160g.

I am going to use the 40g via redraw to purchase a bit extra land alongside my property - i can redraw via internet banking to my offset account.

So if land cost 30g and i used redraw to get 30g from loan to offset account and then paid the landowner for the land from my offset account will there be tax implications? Or?
Click to expand...

There would be 2 separate loans.
1. $160,000, and
2. $30,000

The interest on loan 2 would only be deductible if the money was used for investment/business. If the property is going to be used as an investment it should probably qualify.

But, there is a another issue.

You say you will be putting the money into an offset account. If this account contains other money then my opinion is that the interest on the $30k loan won't be deductible. If the offset account contains no other money then it may be deductible.

Best course of action is to go to the bank and ask for a bank cheque and avoid transferring it.
 
Hi Terry

When i did the refinance - my loan was at 160k so i used the equity in the property to borrow the 200k loan (as one loan) - the bank then transferred the 40g to my offset account which i transferred straight back into the loan so that it was available for redraw upon the land becoming available.

The land is only about an extra 400m2 directly next to my property (the landowner is subdividing a big paddock so i thought if i could get a bit extra land to my average size block it would be great).

Originally was going to set up the loan as 2 seperate loans but thought either way wouldn't be too much difference as money will only be redrawn when land is available so will literally go from loan account to offset account and same day go to landowner.

So the money is used for investment purposes but i currently use my offset for personal use so there is other money in there.

I think yes i should just pay the extra fee and get the bank to do it direct from loan to landowner....least then im safe hey :p
 
Ploengy said:
Hi Terry

When i did the refinance - my loan was at 160k so i used the equity in the property to borrow the 200k loan (as one loan) - the bank then transferred the 40g to my offset account which i transferred straight back into the loan so that it was available for redraw upon the land becoming available.
Click to expand...

err....wtf
 
Original loan amount 160g
When refinanced i borrowed 200g so i would have the 40g available for land
The bank had to fully draw my loan so transferred the 40g to my offset account which i transferred straight back to loan as did not want to contaminate that money.

So the 40g now sits in loan account available for redraw

Also, better mention that this is for an investment property.....
 
Last edited:
Ploengy said:
Original loan amount 160g

The bank had to fully draw my loan so transferred the 40g to my offset account which i transferred straight back to loan as did not want to contaminate that money.

.
Click to expand...

Did the offset account contain any other funds?
 
so what your saying is you you refinanced your IP to an 80% lvr
where 160k is the loan and 40k equity
the equity is in the loan as redraw
and your looking at buying extra land for the IP so it would be taxable
unsure about the contamination but as terry points out a bank cheque may be your best option
unless would creating another account for investment only transactions work if you can transfer into that instead? terry?
 
You must log in or register to reply here.

Similar threads

V
Deductibility of deposit interest from offset
Replies
2
Views
2K
vlvh
V
davidw89
How to property structure two loans
Replies
12
Views
2K
Terry_w
Terry_w
L
Prepaying Interest & LOC
Replies
3
Views
1K
Paul@PFI
Paul@PFI
dabear
interest deductibility...how to fix?
Replies
11
Views
2K
dabear
dabear
M
Using PPOR offset account for PI deposit
Replies
4
Views
1K
Jamie M
Jamie M
Back
Top