Offset account & tax deduction

[RedApple]

Hi All,

I currently have an interest only loan with offset for an IP with LVR of 90%. All my savings (i.e salary income after tax etc) get parked in there to reduce the investment interest bill.

I don't have a PPOR but am saving for one and planning to buy in the near future. The savings in the offset account is to be used for buying PPOR and also for any unexpected emergency like IP maintenance issues etc....So when I'm ready to buy the PPOR and decide to take the saved cash parked in the investment offset account, would interest on the orginal investment loan become tax deductable ?

Also, the IP is neutrally geared so even at 90% LVR I'm not negative gearing or claiming much deduction from the ATO.

Please help. I've only had cash saved this way for a year unknowing of the possible consequences and I'm so worried that once the hard earned savings get used to buy PPOR as planned, interest on the IP will never again be tax deductable

Many thanks

 

[Peter_Tersteeg]

The purpose of putting your savings into an offset account is to:
a. Optimize the use of your savings by paying less interest on the loan.
b. Keep the money you've saved separate from the money you've borrowed.

The second point is why you use an offset account instead of redraw to achieve the first point.

If you put money into the offset account or take it out, you're not actually changing the amount you've borrowed; you're just changing the amount of interest you pay. If you take money out of the offset account, you're not borrowing more money (for any purpose), so the tax deductabability of the loan it's attached to won't be affected.

It looks to me like you're doing the right thing.

 

[RedApple]

Thanks PT_Bear for clarifying, i feel so much better

Just had a scare....a friend of mine who has studied accounting but is not a certified accountant tells me that parking cash savings in an investment offset account is an 'implied' loan reduction and taking that saved cash out is also an 'implied' loan increase. And if the purpose is to buy PPOR, interest on the original loan will no longer be tax deductable (at least not the saved cash amount i put in then take out)

 

[Rolf Latham]

me that parking cash savings in an investment offset account is an 'implied' loan reduction

hahahh : )


they must be studying the new taxation rules that are about to be introduced by the current gov due to Mining tax not doing much : )

Goes in parallel to the new Oxygen tax about to be introduced

ta
rikf

 

[Terry_w]

Thanks PT_Bear for clarifying, i feel so much better

Just had a scare....a friend of mine who has studied accounting but is not a certified accountant tells me that parking cash savings in an investment offset account is an 'implied' loan reduction and taking that saved cash out is also an 'implied' loan increase. And if the purpose is to buy PPOR, interest on the original loan will no longer be tax deductable (at least not the saved cash amount i put in then take out)

I have never heard of anything like this. Ask your friend to back up his argument with case law or tax ruling etc.

 

[SRB]

Just my 2 cents but your friend sounds confused. All you are doing is having money in an account that basically saves the amount of interest you pay. If you had put that money into the loan directly then if you went to redraw you would not be able to claim the interest on the amount you withdrew - not the entire loan. We were in a similar situation a few years ago, but we withdrew the money to invest in another investment stream, so we claimed the interest in full. In my opinion, you are doing the right thing.

 

[Rolf Latham]

I have never heard of anything like this. Ask your friend to back up his argument with case law or tax ruling etc.

An implied

ta
rolf

 

[RedApple]

Hi Rolf Latham, oxygen tax !!! oh gosh

some one else once told me that in some parts of the world (USA i think) there's also such thing as death tax! ... which would cost an individual more to die than being alive

hahahh : )


they must be studying the new taxation rules that are about to be introduced by the current gov due to Mining tax not doing much : )

Goes in parallel to the new Oxygen tax about to be introduced

ta
rikf

 

[RedApple]

Hi Terry,

this friend of mine says he did a master in accounting just in order to do property investing because he wanted to get the tax and structures done properly

I have never heard of anything like this. Ask your friend to back up his argument with case law or tax ruling etc.

 

[RedApple]

Hi SRB,

yes, that's what I'm planning to do. In your case the withdrawal was for investment purpose so it makes sense that the interest should be tax deductable. I was a little worried about mine as the withdrawal of offset cash (not loan draw down) is actually to purchase PPOR which is a personal use not investment.

Thanks everyone for your input

Just my 2 cents but your friend sounds confused. All you are doing is having money in an account that basically saves the amount of interest you pay. If you had put that money into the loan directly then if you went to redraw you would not be able to claim the interest on the amount you withdrew - not the entire loan. We were in a similar situation a few years ago, but we withdrew the money to invest in another investment stream, so we claimed the interest in full. In my opinion, you are doing the right thing.

 

[Hooray]

Tell ya friend to read this:

http://www.ato.gov.au/printfriendly.aspx?doc=/rba/content/85315.htm

From the document:
A taxpayer with an acceptable loan account offset arrangement with dual accounts is entitled to claim a deduction for the full amount of interest incurred on the loan account whilst the loan is used wholly for income producing purposes.

This will remain the case even if funds are withdrawn from the deposit account and used for non-income producing purposes. Depositing funds into the deposit account will decrease the interest payable on the loan account but will not decrease the balance of the loan account. Withdrawing funds from the deposit account will increase the interest payable on the loan account but will not increase the balance of the loan account.


Masters v Google. Google wins.

 

[RedApple]

Thank you so much Hooray, you are a star

Was literally freaked out for a few days after hearing the news from him, thinking I'll be up for a few more $K's worth of lost deduction every year till the IP is sold ~.~ !!!

Gosh I love this forum.

 

[Rolf Latham]

Hi Terry,

this friend of mine says he did a master in accounting just in order to do property investing because he wanted to get the tax and structures done properly

OMG............ one of them .

I come across the perpetual learner quite a bit. Mainly they are highly risk averse and they are a little obsessed by "knowledge is power", but dont realise that applied knowledge usually produces results.

They are they stereotype where you get the 20 + 20 questions........ and they think nothing of asking the same inance ( and in fact highly irrelevant) questions of 10 other brokers and you ( or the other 10) never hear from the again.........................

10 years later you cross paths and they are still perfecting their strategy

So I exaggerate a little ..........


ta

rolf

 

[Terry_w]

Hi Terry,

this friend of mine says he did a master in accounting just in order to do property investing because he wanted to get the tax and structures done properly

Accounting is different to tax and this does not count as authority. Tell him he has to do better than that...

 

[Terry_w]

OMG............ one of them .

I come across the perpetual learner quite a bit. Mainly they are highly risk averse and they are a little obsessed by "knowledge is power", but dont realise that applied knowledge usually produces results.

They are they stereotype where you get the 20 + 20 questions........ and they think nothing of asking the same inance ( and in fact highly irrelevant) questions of 10 other brokers and you ( or the other 10) never hear from the again.........................

10 years later you cross paths and they are still perfecting their strategy

So I exaggerate a little ..........


ta

rolf

The implied investor

 

[Aaron_C]

Yes Terry is right. There are two types of accounting systems - proper accounting and tax accounting. The reason why big accounting firms exist is because they have to reconcile the two systems as one is the system followed by accounting software/textbooks and the other is the one specified by the tax office when it comes to deductions/expenses.

A classic example of the difference between the two is depreciation rates and prepaid expenses.

As for the offset account - the entire point of it is to stop this sort of thing happening so I don't think your friend is right here, I'm sorry. They key is separate account numbers for the offset money and the loan itself.

 

[RedApple]

Thanks everyone for your input. It was lovely reading your replies

 

[Rob G.]

Yes Terry is right. There are two types of accounting systems - proper accounting and tax accounting.

Sounds like the Blues Brothers quote "We have both types of music here ... country AND western".

Accounting is anything you want it to be.

Financial reporting for accountings standards.

Special purpose accounts such as for due dilligence by a prospective investor/takeover.

Special purpose accounts demanded by a prospective lender.

Special purpose accounts to comply with superannuation law.

Accounting for tax purposes.

The list goes on ... it depends upon the end user.

Cheers,

Rob

 

[ZachAnSel]

The purpose of putting your savings into an offset account is to:
a. Optimize the use of your savings by paying less interest on the loan.
b. Keep the money you've saved separate from the money you've borrowed.

The second point is why you use an offset account instead of redraw to achieve the first point.

If you put money into the offset account or take it out, you're not actually changing the amount you've borrowed; you're just changing the amount of interest you pay. If you take money out of the offset account, you're not borrowing more money (for any purpose), so the tax deductabability of the loan it's attached to won't be affected.

It looks to me like you're doing the right thing.

Sorry to highjack this thread, I'm newbie in Property especially tax.
Please be patient if I ask silly questions.
Btw this is my first post, as I spend few week to read few thread. (Hopefully I'm in the right track)

hi PT_Bear,
In that condition, if we put money in Offset account that linked with IP Loan, then It will reduce the interest, which affect the interest deductability?

So by the time we submit tax return, ATO only calculate the interest from (Loan - Offset) not the full loan ammount.

Does it better if we put the money in high interest account in this case??? - Considering there is no PPOR in RedApple's case

kind regards,
Zach