Offset Accounts - How Many ??

Hi There,
I have 3 IP's at present and I am about to do a revaluation, draw down on equity and set up an offset account as I have run into some problems now using the redraw account I have bumbled along with for the past few years.
Question is, do I need to have an Offset account for each property, or will 1 suffice. I have heard some different views on this. Some say only having the one will raise Interest Capitalization problems??

By the way, I have posed this question to my Accountant but it appears he is too busy working on his golf handicap to get back to me.

Can anyone offer any advice, it would be appreciated.

Cheers
Pango
 
Are you aware that if you draw down on your equity and place those funds in an offset account you'll lose tax deductibility on the interest of that portion of the loans ?
 
Are you aware that if you draw down on your equity and place those funds in an offset account you'll lose tax deductibility on the interest of that portion of the loans ?

What the? But if the funds are in an offset account, there won't be any interest on that portion of the loan.
 
Are you aware that if you draw down on your equity and place those funds in an offset account you'll lose tax deductibility on the interest of that portion of the loans ?

This could be the case, especially if other monies are mixed in the account. This because the connection between the borrowing and the using of the money is weak.
 
This can happen with a savings account too - an offset is just a savings.

There is an old case, Domjam I think. Where a woman borrowed money and then parked it in a savings account before using it. The connection between the borrowing and the investing was broken and the interest deductibility denied.

If the offset account was used for nothing else, it probably would be ok - but it sounds risky to me. (But I must admit to doing this myself recently)
 
Rob,
I found myself in a pickle because I parked my Tax return into my redraw account as thats where the money is most convenient, and then bought a boat 1 week before the end of the financial year.
My accountant deemed that as using my redraw funds for personal reasons and swiftly reduced my taxability of that account to 80%. $%^&&*?

My response must be to now have excess funds parked in an offset account, the question is will one do the job, or for Tax reasons should I have one for each of the IP's?

The next question would then be will my bank (WP) allow this?

Cheers
Pango.
 
I would of thought that there is really only a need to have a second offset account when you have more cash in your offset account than the balance of the loan it is attached to ...

Otherwise, why not just have one attached to your largest non deductable debt or if you have non deductable debt, attached to your highest interest rate loan ?

Jason
 
Rob,
I found myself in a pickle because I parked my Tax return into my redraw account as thats where the money is most convenient, and then bought a boat 1 week before the end of the financial year.
My accountant deemed that as using my redraw funds for personal reasons and swiftly reduced my taxability of that account to 80%. $%^&&*?

My response must be to now have excess funds parked in an offset account, the question is will one do the job, or for Tax reasons should I have one for each of the IP's?

The next question would then be will my bank (WP) allow this?

Cheers
Pango.


Exactly the point I was trying to make. This situation can arise with redraws and LOC's, I believe.
But, I think people take fragments of different scenarios and arguments then cobble them together to form a conclusion that is unsupported and incorrect.
Personally, I have multiple Offsets so that I can clearly demonstrate the source and destination of all funds in the event of an audit.
One offset holds all funds released from re-fi's and top ups. Another is a clearing account for rent income and interest and operating expenses. Another is for personal savings and tax return monies.
That way, if I buy a boat with my tax return (not that I could because I don't actually pay any tax to get a return) there is no confusion in an audit scenario.
If I pooled my personal funds with re-fi funds, I'd need a more complex accounting audit trail to clearly show the funds source and destination. Easier and neater for me to just have multiple offsets.
 
I just wanted to state things out to make it clearer as I got a little lost with the disscussions.

if you have a IP with an offset account the interest for that will always be dudectiable regardless of what you do with the funds.

whereas a redraw is where the loan as being partially paid off and you want assess to those funds again, hence you are borrowing it 'again'. but it needs to be stored separately to funds which you may use for personal reasons such as a offset account.

and a LOC is a bit like a redraw but obtained mostly through refinance say to access equity. hence the funds needs to be stored separate to funds used for personal reasons.

i think i got a little thorwn by the word redraw. the only way you could redraw is if it's a P&I loan, is that right?
 
Thanks Guys.

Rob, is it true that the loans must be P&I for the bank to allow Offset arrangements?

I have 2 that are fixed and 1 that is P&I.

My thoughts were that I would have the lot revalued, create 1 Offset account and have all rents paid into it, and have all associated costs for the properties debited from there. Also, I would park the new funds created from the revaluation there ready for my next purchase.

Anyone see any problems with that idea?

Cheers.
 
Hi Pango.
I think that's another mixed metaphore. I've seen people say this time and time ago. It ain't so.
I think this misunderstanding stems from banks only allowing offset accounts linked to variable rate loans as opposed to fixed rate loans.
Although, I think there maybe some fixed rate/offset account products out there, somewhere.
Anyway, somehow, a few people have confused variable rate with P&I,then gone and told a few people that you have to have a P&I loan to have an offset account ... thus creating an urban legend.
When you say you have 2 fixed and one P&I, do you really mean you have 2 fixed and one variable (of course the variable one could be P&I or IO)?
 
Sorry Rob,

2 are fixed IO, and the other is variable IO.

The idea was to have the Offset account attached to the variable IO loan.

Cheers
Pango.
 
My thoughts were that I would have the lot revalued, create 1 Offset account and have all rents paid into it, and have all associated costs for the properties debited from there. Also, I would park the new funds created from the revaluation there ready for my next purchase.

Anyone see any problems with that idea?

Cheers.

That's what I was getting at in post 2 and terry has continued in post 4.

Once you start to dilute borrowed funds with funds from another source in your offset account the tax office may consider that you have lost the direct link between borrowing and investing. Hence you lose deductibilty on the borrowings that you have "parked" in offset.
Whether income derived from an investment will dilute funds borrowed from an investment I don't know.

Note that Rob said that he does do this but he keeps a very clear distinction between which funds are in which offset.

I don't know if it's applicable in this situation but an individual ruling from the Tax office may be a peace of mind solution. You need to get your Accountant off the golf course.
 
Ring your accountant and make an appointment to speak with him face to face. Accountants dont like to give advice over the phone for a number of reasons...... its hard to charge for phone calls AND its harder to give quality advice in a quick phone call.
If you want a quick and cheap answer, ask here on a forum.
If you want an answer from the person doing your return, make an appointment with your Accountant

Dan
 
is it true that the loans must be P&I for the bank to allow Offset arrangements?

No, Bankwest's "Shredder" loan is an IO loan with 100% offset so I assume other banks have an equivalent. As an example if you have a 200K IO loan and have 10K sitting in the offset you just pay interest each month on the 190K difference. I like it.
 
Thanks PHF

I would only I dont have the time to travel interstate at the moment.

I have been thinking of having things handled a little closer to home but havnt got that far.

Anyway, this forum allows a broad view of strategies and is great to use before seeing an accountant.

But I get your point.
Cheers
Pango.
 
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