Are all Offset Accounts OK ?

Discussion in 'Accounting & Tax' started by Paul@PAS, 11th Jul, 2018.

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  1. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Offset accounts have a tax benefit which cant be disputed. However not all offsets are compliant. Many may not be compliant.

    1. The ATO dont accept one persons deposit account can be linked to another persons offset arrangement. A good example of this is your parents have $XX,000 in savings. This CANNOT be linked and be acceptable.

    This also has a hidden trap. Lets assume the deposit account is in the adult childs name. The parents deposit their money with the son...Is it compliant ?? Is there a Part IVA scheme ? Possibly. Highly possible. HoWhat evidence of gifting exists ? Or is it a scheme ? And based on the response in 3, below its possible its not effective in any event since the ATO view is the offset credit value can only exist AFTER the loan.

    2. A further example is a husbands and wife's offset account. Linked to the loan in the ONE name. eg Hubby since wife earns no income. That is NOT compliant either.

    3. A further example is an arrangement which seeks to link a EXISTING deposit account to a NEW loan which has yet to be drawn down. Many brokers are asked to setup a new offset facility for a new loan. Assuming the credited deposits slowly arise AFTER the loan then its no concern. eg Equity release. I trust all lenders offer offsets SOLELY in the same name/s as loans. One concern with that could trip taxpayers up if they move equity to their partners offset etc. I have seen this....So that one taxpayers deductions fall and the other rise....Non-acceptable ??

    All of these may fall foul of Part IVA and result in a cancelled tax benefit AT ANY TIME for the "offset benefit" . Remember in TR 93/6 only an "acceptable offset arrangement" escapes Part IVA so that the tax benefit is not a tax concern.

    A binding private ruling may be recommended.
     
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  2. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    My understanding is that for almost all lenders the offset needs to have identical name to the loan

    Im Often wrong, never in doubt

    ta

    rolf
     
  3. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Yes - However the individuals can also taint this if the source of the funds credited are a scheme. Or if the deposit exists prior to the loan. Or parties to the deposit and the loan create elements of a scheme which provides a tax benefit.

    Like blended loans which can hide a problem I believe many people just assume that all offsets are OK. They may not be. More diligence needs to be applied by taxpayers to the offset. If its homogenous growth in savings over time I see no concerns. But moving funds from a deposit in Mrs X name into the offset in Mr X name may be more Part IVA than many think.
     
  4. Trainee

    Trainee Well-Known Member

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    Has there been a case about this? Spouse putting savings into the partners offset.
     
  5. Blueskies

    Blueskies Well-Known Member

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    Makes sense, otherwise cashed up parents could link their accounts to the children’s mortgages and cut the bank profit out of the equation altogether. not hard to see why the banks wouldn’t allow such a product.
     
  6. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    its not because of that , its because of the tax implications of same

    ta
    rolf
     
  7. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Doesn't AMP offer the ability? I stumbled on something the other night where it appears offsets can be in different names to that of the borrower. But I didn't look into it.
     
  8. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    I don't see how Part IVA could be applied by the ATO to something like this.
     
  9. jprops

    jprops Well-Known Member

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    I don't really get it. Can you spell out the tax benefit?

    I get that you can distribute excess cash to nondeductible loans offsets, to maximise deductions on deductible loans.

    But the examples provided in the OP don't make a clear link to a tax benefit.
     
  10. Trainee

    Trainee Well-Known Member

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    If a parent puts their savings into the adult childs offset, the adult child saves interest. If its PPOR, its not deductible anyway. Even if it was a IP, they get less deductions, so pay more tax. How is this a tax avoidance scheme?

    Lets say a bank allows an account in a husbands name to be offset against a loan in a wifes name. How is that not acceptable, or compliant? Why would it be a tax issue? If it was not allowed, there would be more interest paid to the bank.
     
    Last edited: 11th Jul, 2018
  11. Possumcreek

    Possumcreek Well-Known Member

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    The way I see it there could definitely be a tax benefit for the parents who may be in the 45% tax bracket. Earnings are not in their name, plus they could 'earn' around 4+% interest instead of approx. 2.8% for a term deposit.

    Between them and the adult child I think there could be a net benefit, couldn't there?
     
  12. Trainee

    Trainee Well-Known Member

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    Think thats stretching it a bit since you cant deem the parents to put the money into a term dep. the parents could be keeping the money in a can in the back yard.

    Happy to be proven wrong by a case or tax ruling.
     
  13. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    It is not up to the ATO to dictate where or what a person does with their money - they often say this in private rulings.

    I see nothing wrong with a parent gifting or lending money to an adult relative, interest free even, for them to park in an offset account - from a tax and Part IVA point of view. Plenty of other legal issues though.
     
  14. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    I just encountered one. Yes. The ATO argued Part IVA and that a scheme was evident (taxpayer was quite overly co-operative and didnt seek tax advice before telling the ATO it was the parents money and kept telling them that the reason the parent parked the $$ there was to get a benefit in reducing the loan interest to benefit the property owners :eek:) .

    One of the noted scheme elements was that the parents parked just enough to zero out the interest. Then each month as property owners accumulated their own savings they have been repaying the parents. I felt the ATO reasoning to be sound but referred the taxpayer to a tax lawyer. Now a case of objection and appeal.

    I also share Terrys view. TR 96/6 does refer to the spouse issue. However I would have doubts the ATO would argue the point. Its like spouses sharing expenses for a property. It doesnt matter who paid. I would consider a very distinct scheme would need to be evident. There are many defences to Part IVA for a spouse that could be raised. eg Hubby and wife could buy property with cash but seek a loan. Its for the main residence. Their plan is to move out in 6-9 months and buy a better home and the property is then a IP. So the offsets limits non-deductible interest until that time and means they have cash for the future property. Predominant purpose is arguably not the tax benefit but the retention of cash for the next property which will be their home and be debt free.
     
  15. willy1111

    willy1111 Well-Known Member

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    How is this a tax benefit?

    If the property was an IP, that would reduce interest on loan, meaning an increase in tax payable.

    If the property was PPOR, it would have no effect on tax anyway.

    If parents put the cash in a non interest besring account, there would be no tax payable either.

    If parents put the cash in an interest bearing account, their would have been tax payable.

    If the property owners are repaying to the parents more than just the parents capital given to them, then perhaps the extra could be argued to be income to the parents and be taxable?
     
  16. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Part IVA has multiple limbs. In a simple scenario:
    1. Is it a scheme ? (Almost any arrangement esp involving two parties agreeing to do things could be a scheme)
    2. Was there a tax benefit ?
    3. What was the predominant purpose of the scheme ?

    If the parents have avoided tax on income and its now tax free using the child offset that could be a scheme. And if they obtained a tax benefit Part IVA could apply.

    Have a binding private ruling ?
     
  17. BradH

    BradH Member

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    This is exactly what myself and my partner are planning to do, we just recently purchased a PPOR and will be setting up an offset account to dump 100k of her mums cash in the offset. Can someone please confirm that this is ok for us to do?
     
  18. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    It's ok to do but consider the issues.
     
  19. BradH

    BradH Member

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    But seeing as though it will be our ppor and never an IP there would be no tax benefit right? It would only reduce the amount of interest we pay on our mortgage, or could they look at the 100k like an income or the extra money we are saving by paying less interest because of the 100k in the offset an income?
     
  20. Peter_Tersteeg

    Peter_Tersteeg Mortgage Broker Business Member

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    @BradH it's probably not a question of your personal tax benefits.

    Is the money a gift? Is it a loan? Is there tax to be paid on it an who pays that tax? If your Mum is receiving a pension, does it affect that?

    There's a lot of potential scenarios with this sort of thing that people simply don't consider. Most just treat it as an interest free and give it back when the third party needs it (I see this quite a bit). That doesn't mean they're doing everything by the book though.
     

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