Refinancing for 1st IP - Offset account and use of funds question

[ceebecee]

Hi all,

My wife and I are about to access the equity in our PPOR to invest in some IP's. PPOR should be valued at about 850k, we currently owe 80K on the mortgage. Plan on refinancing with a different bank at 80%, secured by our PPOR.

This is our first IP and I'm just trying to work out how the lending process works in relation to accessing the funds, and whether I need to inform the bank of anything special to ensure that the loan can be tax-deducted correctly.

I've instructed the bank that I want 3 accounts, each with their own 100% offset.

Acct 1: 150K, (PPOR - will owe 40k here - with 110k available)
Acct 2: 40k (Fully drawn to pay off the other 40k from original loan)
Acct 3: 490k (For future investing in IP's)

The lender at the bank stated that at settlement they will put the 490k from Acct 3 into its offset account, ready for me to use for investing. Initially, I only want to access about 120k of this for the deposit on our 1st IP.

Is there a tax issue in having all the 490k in the offset? For some reason I thought that the offset would be at zero, and I would be drawing funds from the loan account as I needed them for deposits (similar to a redraw facility) and the offset would be used later. As we are fairly close to paying off the non-deductible debt on the PPOR, we want to be able to put extra money into the Acct 3 offset in the future, without effecting the tax-deductibility of that account. I'm concerned that having the whole 490k available in the offset (essentially drawn and in a savings account), but only using 120k of it for investing will cause issues with the tax office, especially if we later start putting our salary's into the offset to reduce the interest bill.

Any advise would be greatly appreciated.

 

[Aaron_C]

The bank usually insists on the loan to be fully drawn at settlement so they place it in your offset so you don't pay extra interest. Best thing to do is just redirect those funds back into the loan as redraw.

 

[Rolf Latham]

Who is the lender pls ?

that may determine what is available to you ?

ta
rolf

 

[Terry_w]

Hi all,

My wife and I are about to access the equity in our PPOR to invest in some IP's. PPOR should be valued at about 850k, we currently owe 80K on the mortgage. Plan on refinancing with a different bank at 80%, secured by our PPOR.

This is our first IP and I'm just trying to work out how the lending process works in relation to accessing the funds, and whether I need to inform the bank of anything special to ensure that the loan can be tax-deducted correctly.

I've instructed the bank that I want 3 accounts, each with their own 100% offset.

Acct 1: 150K, (PPOR - will owe 40k here - with 110k available)
Acct 2: 40k (Fully drawn to pay off the other 40k from original loan)
Acct 3: 490k (For future investing in IP's)

The lender at the bank stated that at settlement they will put the 490k from Acct 3 into its offset account, ready for me to use for investing. Initially, I only want to access about 120k of this for the deposit on our 1st IP.

Is there a tax issue in having all the 490k in the offset? For some reason I thought that the offset would be at zero, and I would be drawing funds from the loan account as I needed them for deposits (similar to a redraw facility) and the offset would be used later. As we are fairly close to paying off the non-deductible debt on the PPOR, we want to be able to put extra money into the Acct 3 offset in the future, without effecting the tax-deductibility of that account. I'm concerned that having the whole 490k available in the offset (essentially drawn and in a savings account), but only using 120k of it for investing will cause issues with the tax office, especially if we later start putting our salary's into the offset to reduce the interest bill.

Any advise would be greatly appreciated.

I would advise against this. You will end up with tax problems. Use a LOC instead.

 

[ceebecee]

Thanks for your feedback guys.

The bank is NAB. I talked to the lender again, and he suggested the same as Aaron_C, to put the money straight back into the loan account after settlement, and then just redraw the deposits as I need them.

From my reading of this forum and a few books, the tax office don't mind people using an offset account attached to the mortgage, even if you place personal funds (such as salary etc), as long as the original loan drawing was for an investment.

So if I immediately put the full 490k back into the loan after settlement, the next redraw will count as a new loan. As long as I use it for investment purposes, it'll be fully tax-deductible. I can then place any personal funds into the offset to lower the interest, and this won't effect the tax-deductibility of the original loan. Later, I can draw another deposit out of the loan account, and the same applies. Does this sound right?

 

[Terry_w]

From my reading of this forum and a few books, the tax office don't mind people using an offset account attached to the mortgage, even if you place personal funds (such as salary etc), as long as the original loan drawing was for an investment.

Domjan case - They do mind!

 

[ceebecee]

Thanks Terry,

I did some reading on that case. Would it be correct to say that if we never intermingle the investment funds and the personal funds we should be OK?

For example, if we transfer the 490k from the offset back to the loan after settlement, we have now essentially paid off the loan. Any redraws will count as new loans, so when we buy our first IP, we transfer the deposit directly from the loan account to the REA, completely skipping the offset account. The offset account can then have salary deposited into it to lower the interest, and going forward no investment money will touch that account, and there will be no intermingling of funds.

 

[Terry_w]

Thanks Terry,

I did some reading on that case. Would it be correct to say that if we never intermingle the investment funds and the personal funds we should be OK?

For example, if we transfer the 490k from the offset back to the loan after settlement, we have now essentially paid off the loan. Any redraws will count as new loans, so when we buy our first IP, we transfer the deposit directly from the loan account to the REA, completely skipping the offset account. The offset account can then have salary deposited into it to lower the interest, and going forward no investment money will touch that account, and there will be no intermingling of funds.

Yes, if you have paid the money back into the loan any subsequent withdrawals will be new loans. If you pay directly from the loan account there should be no issues as no mixing will occur.

 

[Kookie7]

Not sure if I'm on the right track here...

If you have an IO loan for an investment property with 100% offset account and put all you cash into the account (wages etc) and then use that offset account to make all purchases, including personal non-investment purchases, is the interest still tax deductible?

I was under the impression that the interest is still tax deductible as the offset account isn't making a new loan with use it's just reducing the interest charged on the existing loan? Is that right?

 

[Rolf Latham]

Not sure if I'm on the right track here...

If you have an IO loan for an investment property with 100% offset account and put all you cash into the account (wages etc) and then use that offset account to make all purchases, including personal non-investment purchases, is the interest still tax deductible?

I was under the impression that the interest is still tax deductible as the offset account isn't making a new loan with use it's just reducing the interest charged on the existing loan? Is that right?

sounds ok for the personal non deductible stuff. The interest on the loan would not be affected.


ta
rolf

 

[Terry_w]

Not sure if I'm on the right track here...

If you have an IO loan for an investment property with 100% offset account and put all you cash into the account (wages etc) and then use that offset account to make all purchases, including personal non-investment purchases, is the interest still tax deductible?

I was under the impression that the interest is still tax deductible as the offset account isn't making a new loan with use it's just reducing the interest charged on the existing loan? Is that right?

An offset account is just a savings account. There are no tax issues if you deposit income with other cash.

 

[SmiTTy2008]

... and going forward no investment money will touch that account, and there will be no intermingling of funds.

Just stumbled on this thread and its a great help as im in a similar situation.

Though i came acrosss this and had to ask...
Is it a no-no for rent (or any investment income) to be paid into an offset account that is part of your ppor loan used for investment property? I.e like acct#3 in OPs case

If so, where should the rent be paid to.. A separate investment account or directly into the loan account?

Thanks

 

[Terry_w]

Just stumbled on this thread and its a great help as im in a similar situation.

Though i came acrosss this and had to ask...
Is it a no-no for rent (or any investment income) to be paid into an offset account that is part of your ppor loan used for investment property? I.e like acct#3 in OPs case

If so, where should the rent be paid to.. A separate investment account or directly into the loan account?

Thanks

Generally not.

The above posts concern borrowed money being parked in an offset account. In this case it is essential that no non borrowed money is mixed with the borrowed money.

But an offset is just a savings account so placing money in it generally doesn't affect deductibility of interest as long as the money in it was not previously borrowed.