Tax-deductibility of interest on IP loan with offset account

[alatus]

Hello everybody,

Ive searched the forum to find out about this issue, to no avail.
Hence my question.

Scenario: IP with IO/variable loan of 300k with an offset account having balance of 150k. Offset Account (lets nickname it as OA) has only recently been set up as a result of topping up my loan and I havent touched the funds as yet. Currently all the interest is tax-deductable, of course, no question around that. Funds sitting in OA are not mine - they are pretty much banks promise to allow me to borrow more against increased equity.

Possible actions:

1. I withdraw 10k, move it across to my share trading account with the intention to buy shares when I find good ones. OA balance goes down to 140k, monthly interest increases a bit.

Question 1: Is the increased interest fully tax-deductible?

2. I deposit into OA 10k from my own, private savings. OA balance goes up to 160k, monthly interest decreases a bit. Tax-deductibility of loan interest stays intact. After some time (say-10 days) I withdraw 10k from OA and move it across to my share trading account with the intention to buy shares when I find good ones. OA balance goes BACK to 150k.

Question 2: Is current interest fully tax-deductible?

3. After another 10 days, I withdraw another 10k from OA and move it across to my share trading account with the intention to buy even more shares OA balance goes down to 140k, monthly interest again increases a bit.

Question 3: Is the increased interest fully tax-deductible?

4. OS balance is 150k I deposit into OA 100k from my own, private savings, just to reduce interest to pay. OA balance goes down to 50k, monthly interest decreases. Tax-deductibility of loan interest stays intact. After 2 months, I withdraw 100k back from OA and spend it on my hobby (sailing cruise). OA balance goes BACK to 150k. Since this was my original savings anyway and I?m merely getting it back, I would assume that tax-deductibility of loan interest on my investment stays intact? Hence my question:

Question 4: Is current interest fully tax-deductible?

Thanks Guys for any clarifications

Anthony

 

[Terry_w]

Assuming the offset account contains no borrowed money:

1. You are not borrowing to buy shares so not direct tax issues. But taking the money from the offset will mean the interest on the loan increases. This loan was for the IP so the increased interest would be claimable against the IP.
2. An offset account is just a savings account. No tax effects except similar to 1
3. See 2
4. See 3
Do you have non deductible debt? If so you could structure better.
A PPOR house? If not, what if you buy one in the future? You could be structuring better.
You have to ask yourself what would happen if you sold the property?

 

[Paul@PFI]

Yes Terry raises the correct point that the key issue here is the offset is reducing the deductible interest. Yet your questions focus on asking how to increase it. And all questions refer to smaller amounts like $10k etc. The offset itself is the problem.

First of all the offset was recently created so I assume you had savings. Savings earn interest and you pay tax on that right. The deduction for the IP is 100%. So by creating an offset you pay interest on the net amount. The effect is you can forego a 5% interest cost and that's akin to a 5% earn BUT there is no tax effect when its a non-deductible. In your case you are losing tax deductions as the IP loan is deductible. Very inefficient. You might as well earn 5% and pay tax. (not that you can earn 5%)...

Ideally offset accounts should offset to a non-deductible debt that way deductible deductions are maximised and the non-deductible is minimised. Offsets against deductible debt are a waste. For most taxpayers the difference is a loss of 40% of the value of the interest offset benefit. (That is the taxpayers marginal tax rate).

So in your example $150K x 5% x 40% = $3000pa loss of tax benefits (ie a reduced refund)

 

[alatus]

Terry_w writes: assuming the offset account contains no borrowed money:
-----------------------------------------------------------------------

well, actually I think it does, because it has been set up as a result of topping up my loan. I understand that funds sitting in OA are not mine - they are pretty much banks promise to allow me to borrow more against increased equity.

 

[Terry_w]

That changes things completely. You have a mixed purpose loan and only a portion (if any) of the interest will ever be deductible.

Costly mistake!

 

[marg4000]

It all depends on what you have done with the money you received after topping up your loan. If you put it in an offset account then it is for private purposes and the interest on that part of the loan will never be tax deductible

And you are wrong - the funds in your offset account are your own private monies, and will never give rise to deductible interest even if you use it for investment.

You would be advised to seek good tax advice as it appears you have contaminated your loan which will cause ongoing problems for you. Unless addressed correctly it may turn into a nightmare.
Marg

 

[marg4000]

Oops. Terry already replied while I was typing.

Listen to Terry as he is far more qualified than I am!
Marg

 

[kennyboi]

What about this scenario:

My loan for IP was at 270k
I increased the loan to 320k some years ago, with 50k difference in offset. My share trading account is set to direct debit/credit to my offset and I used this 50k to buy/sell shares.

If loan balance is over 270k at the time I bought shares, is interest for that bit over 270k tax deductable?

If it is not tax deductable, if I refinance my loan or reduce loan size back to 270k, is the 270k still fully tax deductable?

Thanks

 

[Terry_w]

Assuming offset never contained any money other than the $50k borrowed...

If loan balance is over 270k at the time I bought shares, is interest for that bit over 270k tax deductable?

What does this mean? You borrowed $50k to park in an offset so the balance would be $320k. If you took money from the offset to buy shares you could argue this was borrowed (weak argument I think) and therefore the extra interest deductible.

If it is not tax deductable, if I refinance my loan or reduce loan size back to 270k, is the 270k still fully tax deductable?

ASsuming not deductible, you would have a mixed loan. There is a tax ruling which says you can split and unmix so you could split into $270k and $50k portions and the $270k portion may then be deductible. You could use the offset account to pay off the $50k loan... If you used the offset to pay down the $320k you could be actually paying down a portion off each of the deductible and non deductible loans - so split first.

 

[kennyboi]

Assuming offset never contained any money other than the $50k borrowed...

What does this mean? You borrowed $50k to park in an offset so the balance would be $320k. If you took money from the offset to buy shares you could argue this was borrowed (weak argument I think) and therefore the extra interest deductible.

I was making 50k available for shares so when price is right, I have funds to buy. How do other people buy/sell shares repeatedly using loan from equity on the property?

ASsuming not deductible, you would have a mixed loan. There is a tax ruling which says you can split and unmix so you could split into $270k and $50k portions and the $270k portion may then be deductible. You could use the offset account to pay off the $50k loan... If you used the offset to pay down the $320k you could be actually paying down a portion off each of the deductible and non deductible loans - so split first.

Do you mean ask the bank to split it into 2 separate loan accounts 270k + 50k?

 

[Terry_w]

I was making 50k available for shares so when price is right, I have funds to buy. How do other people buy/sell shares repeatedly using loan from equity on the property?



Do you mean ask the bank to split it into 2 separate loan accounts 270k + 50k?

1. I advise clients to use a LOC.

2. Yes

 

[kennyboi]

1. I advise clients to use a LOC.

2. Yes

With the split, does it has to happen with the same bank, or can I refinance + split to any bank at the same time?

 

[Terry_w]

With the split, does it has to happen with the same bank, or can I refinance + split to any bank at the same time?

Lender doesn't matter

 

[GlennG]

Hello everybody,

Ive searched the forum to find out about this issue, to no avail.
Hence my question.

Scenario: IP with IO/variable loan of 300k with an offset account having balance of 150k. Offset Account (lets nickname it as OA) has only recently been set up as a result of topping up my loan and I havent touched the funds as yet. Currently all the interest is tax-deductable, of course, no question around that. Funds sitting in OA are not mine - they are pretty much banks promise to allow me to borrow more against increased equity.

snipped rest

Anthony

I haven't understood the answers to your question but that may well be because I don't know much about tax!

I just wonder if confusion is caused by you saying that you have 150K in the offset account, but that you haven't touched the funds yet. Are you sure that the funds are actually in the offset account?

When you want to invest the first 10K, will you be able to transfer 10K out of the offset account, or will you have to request the bank to release the 10K? If you have to make a request to the bank then I imagine you have no problem with the approach that you are taking - you would get your bank to transfer the 10K directly to your broker account or whatever, and then there's no contaminating or anything like that.

 

[thesuperman]

1. I advise clients to use a LOC.

2. Yes

You advise a LOC because then the interest can be deductible for an investment purpose into shares whereas if it was from an Offset then it wouldn't because in essence the Offset is a "savings" account, correct?

 

[Terry_w]

You advise a LOC because then the interest can be deductible for an investment purpose into shares whereas if it was from an Offset then it wouldn't because in essence the Offset is a "savings" account, correct?

I advise people to use a LOC to access equity because the money can be paid straight from the loan and not via transferring to a savings account then to the payment as this can cause interest deductibility to be broken.

 

[kennyboi]

I advise people to use a LOC to access equity because the money can be paid straight from the loan and not via transferring to a savings account then to the payment as this can cause interest deductibility to be broken.

I asked my bank about redraw from another of my loan account. They said any redraw has to be via a transaction account and can't pay 3rd party directly. Can I argue that due to bank policy, I had to pay it out to my supplier via my offset right after redraw from the loan account?

 

[Terry_w]

I asked my bank about redraw from another of my loan account. They said any redraw has to be via a transaction account and can't pay 3rd party directly. Can I argue that due to bank policy, I had to pay it out to my supplier via my offset right after redraw from the loan account?

Yes, but your argument will fail.

 

[kennyboi]

Yes, but your argument will fail.

Does it work if I create a new clean transaction account that act as a suspense account for the loan to pay suppliers suggested here?

 

[Terry_w]

Does it work if I create a new clean transaction account that act as a suspense account for the loan to pay suppliers suggested here?

You should seek tax advice.