Set-up of bank accounts

[dwv]

Been reading a lot about account structures/set-up and debt recycling (especially Corsa's post). I'm still a bit confused if it would make a big difference in our case. We currently have a PPOR and we'll be buying our first IP next week. IP will be negatively geared and we used cash instead of equity for the deposit. We currently have an offset account linked to our PPOR loan and this also where we get our everyday expenses as our salaries go into this account.

My question is, will we have to restructure our offset and loan accounts when IP loan comes in or will there be no problem in putting all the the rent into the PPOR offset and getting the interest repayments & expenses for the IP from the same account? Would the accountant have a problem with this setup? If we have to restructure it, what would be the best way?

 

[alexlee]

Been reading a lot about account structures/set-up and debt recycling (especially Corsa's post). I'm still a bit confused if it would make a big difference in our case. We currently have a PPOR and we'll be buying our first IP next week. IP will be negatively geared and we used cash instead of equity for the deposit.

Why did you decide to do it that way? Instead of, say, putting the cash into the PPOR loan first, then redrawing?
Alex

 

[dwv]

Why did you decide to do it that way? Instead of, say, putting the cash into the PPOR loan first, then redrawing?
Alex

Didn't think it would make a difference at first but having read some posts I think we should have done so... Will there be a big difference? Cash was always in the offset account.

 

[alexlee]

Didn't think it would make a difference at first but having read some posts I think we should have done so... Will there be a big difference?

Annual cashflow difference = the deposit x interest rate x your marginal tax rate.

Ok, it's not a lot, but it's good to get into the habit of thinking about such things.
Alex

 

[dwv]

Annual cashflow difference = the deposit x interest rate x your marginal tax rate.

Ok, it's not a lot, but it's good to get into the habit of thinking about such things.
Alex

How do we compute for marginal tax rate? Another thing is we wouldn't want to link our IP with our PPOR in case something happens. Maybe with the next IP we'll use the equity from the frist IP.

 

[dwv]

Anyway... still, my question is how should we setup our accounts now so we could be more tax efficient? Will our current setup (1 offset/savings account for both PPOP and IP) suffice?

 

[bort]

My question is, will we have to restructure our offset and loan accounts when IP loan comes in or will there be no problem in putting all the the rent into the PPOR offset and getting the interest repayments & expenses for the IP from the same account? Would the accountant have a problem with this setup? If we have to restructure it, what would be the best way?

There is no need to actually restructure what you are doing, however, you could probably do it better ....

By setting up this way you are missing out on potentially capitalising the interest on your IP, and also, and more commonly I would think, capitalising interest on your expenses. This is because you are not taking those expenses from a loan account, but using the cash in an offset account - so its effectively like you are paying them with cash.

To do it more effectively you'd need to set up another loan account, and redraw expenses for your IP from that, instead of from your offset account. Its then likely that the interest incurred on that loan account would be deductible.

So at the end of the day you'd have a higher loan amount (deductible) due to the second loan account, but also a higher offset (against non deductible debt), as you wont have been taking expenses out of your offset account.

 

[dwv]

There is no need to actually restructure what you are doing, however, you could probably do it better ....

By setting up this way you are missing out on potentially capitalising the interest on your IP, and also, and more commonly I would think, capitalising interest on your expenses. This is because you are not taking those expenses from a loan account, but using the cash in an offset account - so its effectively like you are paying them with cash.

To do it more effectively you'd need to set up another loan account, and redraw expenses for your IP from that, instead of from your offset account. Its then likely that the interest incurred on that loan account would be deductible.

So at the end of the day you'd have a higher loan amount (deductible) due to the second loan account, but also a higher offset (against non deductible debt), as you wont have been taking expenses out of your offset account.

Should the other loan account be a LOC? Our case is a bit complicated... loan for the IP will actually be divided into 2 (long story but already approved). There will be the one separate loan (300K for example) and another one "linked" to our PPOR loan classified as an investment loan (amount is around 80K for example). If we put the cash payment for the 300K loan on the 80K loan first then redrawing the amount to pay for the 300K loan, would it be the same? Would using the credit card for all IP expenses achieve the same result? Sorry if it's more confusing now....

 

[dwv]

There is no need to actually restructure what you are doing, however, you could probably do it better ....

By setting up this way you are missing out on potentially capitalising the interest on your IP, and also, and more commonly I would think, capitalising interest on your expenses. This is because you are not taking those expenses from a loan account, but using the cash in an offset account - so its effectively like you are paying them with cash.

To do it more effectively you'd need to set up another loan account, and redraw expenses for your IP from that, instead of from your offset account. Its then likely that the interest incurred on that loan account would be deductible.

So at the end of the day you'd have a higher loan amount (deductible) due to the second loan account, but also a higher offset (against non deductible debt), as you wont have been taking expenses out of your offset account.

Should the other loan account be a LOC? Our case is a bit complicated... loan for the IP will actually be divided into 2 (long story but already approved). There will be the one separate loan (300K for example) and another one "linked" to our PPOR loan classified as an investment loan (amount is around 80K for example). If we put the cash payment for the 300K loan on the 80K loan first then redrawing the amount to pay for the 300K loan, would it be the same? Would using the credit card for all IP expenses achieve the same result? Sorry if it's more confusing now....

 

[bort]

Should the other loan account be a LOC? Our case is a bit complicated... loan for the IP will actually be divided into 2 (long story but already approved). There will be the one separate loan (300K for example) and another one "linked" to our PPOR loan classified as an investment loan (amount is around 80K for example). If we put the cash payment for the 300K loan on the 80K loan first then redrawing the amount to pay for the 300K loan, would it be the same? Would using the credit card for all IP expenses achieve the same result? Sorry if it's more confusing now....

i'd say most people would use a LOC ...

If you are borrowing the 80k for the investment property it's already deductible, so why would you bother shuffling money in and out? if the 80k is a LOC for expenses to be used later, you'd just withdraw cash out of that account when it is required for IP related expenses and not up front.

i'm not sure what you mean by cash payment?

if you were using a credit card for ONLY IP expenses, you can probably pay it out each month from your LOC and its likely that the LOC interest would be deductible.