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Are funds from offset to pay investment deposit tax deductible?

Discussion in 'Accounting & Tax' started by kennyboi, 10th Apr, 2016.

  1. kennyboi

    kennyboi Well-Known Member

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    Are funds drawn from an offset account to pay for an investment property 10% deposit tax deductible?

    I know it is likely not, but my friend don't believe it and I cannot find specific reference or ruling from ATO to convince them. Can anyone please guide me?

    Thanks
     
  2. D.T.

    D.T. Specialist Property Manager Business Member

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  3. kennyboi

    kennyboi Well-Known Member

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    I agree, but my friend said the money was drawn from the loan and it goes towards the investment purchase.
     
  4. D.T.

    D.T. Specialist Property Manager Business Member

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    Drawn from the loan and drawn from the offset are 2 very different things.

    Interest incurred on drawing money from loan can be deductible if used for investment purchase. It's not a clean situation to be in though, especially if the main part of the loan is for his PPOR. It'll give his accountant a migraine.
     
  5. Hodor

    Hodor Well-Known Member

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    And remember an offset and redraw account are two very different things. People too often say they are the same.
     
  6. Terry_w

    Terry_w Structuring Broker and a Structuring Lawyer Business Member

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  7. kennyboi

    kennyboi Well-Known Member

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  8. Terry_w

    Terry_w Structuring Broker and a Structuring Lawyer Business Member

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    What does she think is ok?

    Yes she can take savings from an offset account to use as deposit. There is no direct interest incurred as offset accounts don't pay interest. They reduce the interest payable on the associated loan that they are connected to.

    Indirectly the interest on the loan that the offset is attached to will increase. If this loan interest is deductible because it was used to purchase an investment property then in that case the interest on the deposit would indirectly be deductible.

    If the offset was linked to a non-deductible home loan then the extra interest incurred on this loan would not be deductible.
     
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  9. Terry_w

    Terry_w Structuring Broker and a Structuring Lawyer Business Member

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  10. vfn

    vfn New Member

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    @Terry_w, in the case where the 10% deposit for an investment property is paid from a new LoC, created just for this purpose, and secured against the PPoR. Will the interest paid in the LoC, until the settlement happens, be tax deductible?
     
  11. Terry_w

    Terry_w Structuring Broker and a Structuring Lawyer Business Member

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    Yes it could be.
     
  12. vfn

    vfn New Member

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    Thanks @Terry_w!

    I believe your Tax Tip 9: Don’t use Cash in Offset account to Invest only refers to the deposit money when settling, right?

    This 10% deposit might be a great topic for one more of your great tax tips, with some scenarios when it would and when it wouldn't be tax deductible.
     
  13. Terry_w

    Terry_w Structuring Broker and a Structuring Lawyer Business Member

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    No, I was referring to any payment of an investment expense or an investment itself.
     
  14. vfn

    vfn New Member

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    @Terry_w you touched on the deductibility of the interest related to the deposit money on Tax Tip 118: Deductibility of interest where settlement never happens and deposit lost

    Although on that scenario the investment property was never completed, the ATO ruled in favour of the taxpayer because the intentions were legit.

    I called the ATO and the rep said that the interest can be deductible, and also pointed me to TR 2004/4 TR 2004/4 - Income tax: deductions for interest incurred prior to the commencement of, or following the cessation of, relevant income earning activities (As at 22 March 2017)
     
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  15. Citing a tax ruling is not in itself a opinion or a private ruling or taxpayer specific advice.

    I would argue that choosing to self determine a deduction that is unrelated to production of income at any time is a potential concern. Personal tax advice may be important and also avoid penalties.

    The ATO did NOT give you tax advice that the interest "can be deductible". I would consider quite the opposite view unless you have a private ruling.
     
  16. vfn

    vfn New Member

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    Hi @[email protected] ,

    You're correct, maybe I should have said interest "could be deductible", if it meets the criteria on TR 2004/4. I'm not a tax specialist and I'm just trying to understand what's possible and what's not.

    Based on your reply, that interest is not deductible, unless you have a private ruling. If that's the case, for the purchase of an existing property where the interest paid over a period of 30-90 days will not be a lot, it doesn't make sense to go down that path as the work involved on getting the private ruling might be more expensive then possible tax benefits. But for developments and OTP deposits, it might be worth to pursue the private ruling as on this cases the interest paid over the several months/years could result on getting back several hundred dollars.