Funny to see these journalists write a whole article and then not mention the only things that really matter in making the decision. No wonder they do what they do.
Using an offset account - Accountant says "No"
- Thread starter Roosterman
- Start date
actually, its worse.............
The quoted industry expert doesnt make the distinction.
Now folks might understand why I have such a dislike of some the "comparison" sites, and the quoting of lenders' trophy or medals from these comparisons.
They like to compare oranges to carrots because they have the same colour, and as thus the comparisons arent worth a banana many times, and in the real world, for many consumers, their 5 star ratings may be even worth less than a banana.
ta
rolf
to be fair, to a lot of people redraw or offset dont really matter to them
Especially the target audience...
Funny how we sometimes try and complicate something so simple - often a misunderstanding due to lack of knowledge which can go on for years before corrected, sometimes only by someone picking up on a minor passing comment! I have never has any trouble on working out interest claimable - simple as MikeF said. But I (and others) have to be careful on mixing accounts. I believe I have myself covered - but willing to be corrected.
I currently have and offset account linked to a loan which consists of some unused loan money, personal savings which existed in another account before being tipped into the offset account, deposits from various sources (non loan or IP related), and rental income. From this I withdraw money for personal needs, interest on the loan (whatever the amount is which is not offset), and other IP expenses. I have always maintained a balance well in excess of the unused loan money (and rental income to be doubly cautious), so my argument is that all personal money withdrawn is from money I have deposited from sources other than rental or borrowings. It is like having two accounts within one with an imaginary wall between them - lets say side A is unused loan money/IP expenses and rental income and side B is private deposits/general everyday account.
As per what I was advised my Nick Moustacas (Strategic Wealth Management) at a seminar once, interest can be paid out of borrowings (side A) and rental income can go into an account for private purposes (side B). As long as I never eat into what remains of side A for person expenses I should be safe. Although not necessary, I count rental income as going into side A in case there ever is a debate on where it should go - at least until I need it
. I have a spread sheet set up to keep a record of every cent spent and what category it falls into, plus rental income/management fees updated annually. I know what the property has cost me to the cent before and after rental income is taken into account.I read in a magazine once where mixing accounts can get confusing and bought an investor undone in the eyes of the tax man, (which I don't think applies in my situation):
She had two accounts - a private everyday account and a loan account of some description. She paid some IP expenses out of her everyday account and then reimbursed her private account by the same amount from her loan account. (I can see many reasons why this may have been done). This seems like a straight forward matter and all interest incurred by her loan was claimed. However the taxation dept saw this differently - they did not see the link, only that she used loan money to top up her private everyday account and therefore she could not claim interest on this amount. You would think that common sense would prevail as it is quite clear what occurred, but no!
true, but at what point does one make the decision ?
For 9 out of 10 it will never make any difference, for one out of 10 it may cost them 10 to 100s of k.
Not covering the eventuality that a client may one day change the use of the property to an IP in such a discussion is in my view seriously lacking and should not go to press.
It is exactly that sort of generalist material in influential media that causes people to make inadeqaate decisions because thay act in reliance of inadequate data.
Just my view of course, but that view is formed from having dealt with 100 plus of these "inadequate advice "issues in recent times.
ta
rolf
Funny how we sometimes try and complicate something so simple - often a misunderstanding due to lack of knowledge which can go on for years before corrected, sometimes only by someone picking up on a minor passing comment! I have never has any trouble on working out interest claimable - simple as MikeF said. But I (and others) have to be careful on mixing accounts. I believe I have myself covered - but willing to be corrected.
I currently have and offset account linked to a loan which consists of some unused loan money, personal savings which existed in another account before being tipped into the offset account, deposits from various sources (non loan or IP related), and rental income. From this I withdraw money for personal needs, interest on the loan (whatever the amount is which is not offset), and other IP expenses. I have always maintained a balance well in excess of the unused loan money (and rental income to be doubly cautious), so my argument is that all personal money withdrawn is from money I have deposited from sources other than rental or borrowings. It is like having two accounts within one with an imaginary wall between them - lets say side A is unused loan money/IP expenses and rental income and side B is private deposits/general everyday account.
As per what I was advised my Nick Moustacas (Strategic Wealth Management) at a seminar once, interest can be paid out of borrowings (side A) and rental income can go into an account for private purposes (side B). As long as I never eat into what remains of side A for person expenses I should be safe. Although not necessary, I count rental income as going into side A in case there ever is a debate on where it should go - at least until I need it
I read in a magazine once where mixing accounts can get confusing and bought an investor undone in the eyes of the tax man, (which I don't think applies in my situation):
She had two accounts - a private everyday account and a loan account of some description. She paid some IP expenses out of her everyday account and then reimbursed her private account by the same amount from her loan account. (I can see many reasons why this may have been done). This seems like a straight forward matter and all interest incurred by her loan was claimed. However the taxation dept saw this differently - they did not see the link, only that she used loan money to top up her private everyday account and therefore she could not claim interest on this amount. You would think that common sense would prevail as it is quite clear what occurred, but no!
If you have borrowed money and placed it into an offset account and then later put unborrowed money in that same account then you have contaminated the loan.
let me explain with an analogy:
Urinate into a bottle and then place water into the same bottle. Say 50% each. Then when you get thirsty take out a glass of 'water' to drink. Using a spreadsheet you could say all the water is actually water and that you haven't used the urine part. Would you drink it?
Same with interest deductibility. When you take out cash from the offset to use for personal expenses how could you say you are taking out the private cash expenses and not the borrowed money. Same when investing. How could you say you are taking the borrowed money?
The case you referred to in the API mag was probably that of Domjan v FCT. She was denied a full deduction of interest because of mixing.
Don't forget TR 2000/2
Second Exception - Refinancing mixed purpose debt
18. A taxpayer may choose to refinance a debt outstanding on a mixed purpose sub-account by borrowing an equivalent amount under two separate accounts or sub-accounts. If the sums borrowed under those two separate accounts are equivalent to the respective income producing and non-income producing parts of the existing outstanding debt, we accept that interest accrued on the debt incurred in refinancing the income producing portion of the mixed purpose debt will be deductible.
Second Exception - Refinancing mixed purpose debt
18. A taxpayer may choose to refinance a debt outstanding on a mixed purpose sub-account by borrowing an equivalent amount under two separate accounts or sub-accounts. If the sums borrowed under those two separate accounts are equivalent to the respective income producing and non-income producing parts of the existing outstanding debt, we accept that interest accrued on the debt incurred in refinancing the income producing portion of the mixed purpose debt will be deductible.
I would say your accountant is wrong.
Here is the logic I see:
There are 2 accounts:
Acct 1234 IP Interest Only Loan $100,000 - used to purchase IP
Acct 5678 Offset - personal use
End of first month
Acct 1234 - balance $100,000 - you pay $583 interest (at 7%)
Acct 5678 - balance $0
Start of second month deposit $10,000 in Acct 5678
End of second month
Acct 1234 - balance $100,000 - you pay $525 interest
Acct 5678 - balance $10,000
Start of third month withdraw $10,000 from Acct 5678
End of third month
Acct 1234 - balance $100,000 - you pay $583 interest
Acct 5678 - balance $0
I would say the $583 is 100% deductible because Acct 1234 was ONLY used for IP purposes.
You were charged less interest in month 2, but it does not change the fact that the Acct 1234 principal was only used for income generating purposes.
This is similar to when a person uses the PPOR to secure an IP loan. The PURPOSE of the IP loan is to generate income, so interest is deductible.
In the scenario above, the Acct 1234 was used 100% for generating income so the interest charged is 100% deductible. If the bank decides to charge less interest one month that does not affect the PURPOSE of the loan.
I suggest you find a new accountant.
PS I used Interest Only just to make the maths easier, it would equally apply to a P&I investment loan.
Here is the logic I see:
There are 2 accounts:
Acct 1234 IP Interest Only Loan $100,000 - used to purchase IP
Acct 5678 Offset - personal use
End of first month
Acct 1234 - balance $100,000 - you pay $583 interest (at 7%)
Acct 5678 - balance $0
Start of second month deposit $10,000 in Acct 5678
End of second month
Acct 1234 - balance $100,000 - you pay $525 interest
Acct 5678 - balance $10,000
Start of third month withdraw $10,000 from Acct 5678
End of third month
Acct 1234 - balance $100,000 - you pay $583 interest
Acct 5678 - balance $0
I would say the $583 is 100% deductible because Acct 1234 was ONLY used for IP purposes.
You were charged less interest in month 2, but it does not change the fact that the Acct 1234 principal was only used for income generating purposes.
This is similar to when a person uses the PPOR to secure an IP loan. The PURPOSE of the IP loan is to generate income, so interest is deductible.
In the scenario above, the Acct 1234 was used 100% for generating income so the interest charged is 100% deductible. If the bank decides to charge less interest one month that does not affect the PURPOSE of the loan.
I suggest you find a new accountant.
PS I used Interest Only just to make the maths easier, it would equally apply to a P&I investment loan.
While I am ranting....
May I say a lot of accountants are basically useless and don't understand finance.
One example is when I was having a general conversation about interest rates, this was around 6 years ago. I said that if the RBA increases rates too much it will raise the value of the AUD, hurting exporters. The accountant looked at me dumbly "Are interest rates linked to the value of the dollar?".... I was not impressed.
May I say a lot of accountants are basically useless and don't understand finance.
One example is when I was having a general conversation about interest rates, this was around 6 years ago. I said that if the RBA increases rates too much it will raise the value of the AUD, hurting exporters. The accountant looked at me dumbly "Are interest rates linked to the value of the dollar?".... I was not impressed.
Thanks for that Rob G, as I wipe my nose with a bloodied tissue
A good read, reasonably clear, although it does not give an example of an acceptable arrangement which fits exactly with my situation. The example at point 26 seems to cover my situation "generally". Point 29/30 of what is not acceptable appears to be the result of the account earning interest when in credit, which is not the same as an offset which never earns interest, only reduces the amount of interest payable. (If there is a clause with my offset which does permit a nominal interest earned if the balance exceeds the loan amount, this will not occur in my situation)
It would be interesting to get a yes or no on my situation from the tax dept, but can this be done without disclosing my identity - and risk waking a sleeping dog
Sniffle, has someone got another tissue
A good read, reasonably clear, although it does not give an example of an acceptable arrangement which fits exactly with my situation. The example at point 26 seems to cover my situation "generally". Point 29/30 of what is not acceptable appears to be the result of the account earning interest when in credit, which is not the same as an offset which never earns interest, only reduces the amount of interest payable. (If there is a clause with my offset which does permit a nominal interest earned if the balance exceeds the loan amount, this will not occur in my situation)
It would be interesting to get a yes or no on my situation from the tax dept, but can this be done without disclosing my identity - and risk waking a sleeping dog
Sniffle, has someone got another tissue
The problem is that some products labeled as an 'offset account' are not truly as such. Some are mere notional setoffs and the actual funds are comingled.
Thanks to marketing BS of banks and some brokers.
Your Accountant may have been aware of this with your account and was warning you.
Read your loan contract.
Cheers,
Rob
Thanks to marketing BS of banks and some brokers.
Your Accountant may have been aware of this with your account and was warning you.
Read your loan contract.
Cheers,
Rob
