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Contributions to offset account

Discussion in 'Property Finance' started by 70seven, 4th Sep, 2015.

  1. 70seven

    70seven Member

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    Hi all,
    Does anyone contribute any extra cash into their offset accounts linked to their IP properties? What I'm trying to figure out is, I have an IP that I used to pay P&I and changed to IO. Because my repayments are lower, should I put the difference between the IO repayment and the P&I repayment back into the offset account?
     
  2. chylld

    chylld Well-Known Member

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    That money wouldn't be working very hard for you as it's reducing tax-deductible debt. Would be much better putting that money in your PPOR offset (/ paying down PPOR) or some other investment.
     
  3. Perthguy

    Perthguy Well-Known Member

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    I do, because I have no non-deductible debt. When I had non-deductible debt, I put the money into an offset account attached to that.
     
  4. Perthguy

    Perthguy Well-Known Member

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    Yeah, it's not a very good return but I need the funds in my offset account to be "at call" because I am investing them soon. If it wasn't for that, I would be looking for a higher return. Actually, that's a good point. If you are paying 4.15% interest, the effective return on funds in an offset account is less than that. So, if you can invest elsewhere and get a return of more than 4.15% (after tax) then you should invest elsewhere.
     
  5. chylld

    chylld Well-Known Member

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    This doesn't affect tax deductibility of the IP loan to which the offset is attached, right? i.e. the interest accrued on the IP loan isn't contaminated in any way?
     
  6. chylld

    chylld Well-Known Member

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    I'm sort of in a similar position - using an IP offset since my PPOR loan doesn't have an offset facility. So IP offset is used as the transacting account (hence why I asked the above question) and excess funds go towards PPOR debt.
     
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  7. Perthguy

    Perthguy Well-Known Member

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    It doesn't affect the tax deductibility of the IP loan interest.
     
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  8. 70seven

    70seven Member

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    thanks for the reply guys,
    wouldn't it only be reducing tax deductible debt if I was paying off the principal. I'm planning to put the money in the offset account.
     
  9. chylld

    chylld Well-Known Member

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    Putting money into the IP offset reduces the amount of interest charged, and thus the amount of interest that can be claimed as a tax deduction. It reduces your effective tax deductible debt amount.
     
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  10. 70seven

    70seven Member

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    Ok cool. Got it.
     
  11. Steven Ryan

    Steven Ryan Mortgage Broker Business Plus Member

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    @Perthguy makes a good point about beating the return after tax.

    Something a lot of people overlook.

    Saving 4.15% interest having money parked in offset is not that bad. Lets say you invested elsewhere and made a 6% return but paid 37% tax on the profit. You're worse off.
     
  12. chylld

    chylld Well-Known Member

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    Yes but we're talking about an IP offset here. So every dollar in the offset isn't saving 4.15% interest, but 4.15% * (1-0.37) = 2.61%. In other words, you only need to invest elsewhere for a return of greater than 4.15% to be better off.
     
  13. JDP1

    JDP1 Well-Known Member

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    Yea, any surplus went to credit cards and the like first then into offset...
     
  14. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    But only if the offset was on a non deductible loan. Because if it was an investment loan the interest payable on the loan would increase and this would mean taxable income increases.
     
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  15. KayTea

    KayTea Well-Known Member

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    Is it worth considering a tax effective investment bond? I know you were talking about needing the funds for another investment soon, and this would remove that option.

    But, given that a number of people have been talking about tax implications, I've found the fund a great place to divert funds for a long-term payoff. By putting funds into this account, and leaving them there without touching them for 10+ years, I pay no interest on the gains made.

    The great thing is that I can continue to deposit into the fund, when I have the $$$ available, and the 10 years rule means that the funds put in during the ninth year only end up staying there for 12 months or less.

    It's proven to be a great saving strategy for junior's high school fees (which wont need to be touched until she's 12 years old - so the 10 year rule isn't an issue), and although it's a bond (so it fluctuates with the market), I'm still sitting at about 13-14% return.
     
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  16. S0805

    S0805 Well-Known Member

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    Hi KayTea, I am exploring the idea of investing in Investment bonds. I am looking for the Med term tax saving solution for high income earner. I think I've understood how this works and how one can keep contributing till 10 yrs and get money at the end of 10 yr period tax free and also option of transferring to someone else without
    any tax implications....

    How would one select the best insurance bond. I mean, I prefer to be in high growth strategy. Are Insurance bonds same as managed funds except the 10 yr arrangement? Is there any website or some info where you can compare these insurance bonds so you select the right product. Keen to know from your experience how best to approach this?
     
  17. KayTea

    KayTea Well-Known Member

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    Honestly, I can't answer many of your questions - I just 'signed on the dotted line' about 8.5 years ago, when my financial planner recommended this as a way to save up for my daughter's high school fees.

    The one I'm in is through ING, but I have no idea if they are the best, are high growth etc. Sorry, I can't be of more help than that. But, since starting it in early 2007, it's current balance has it at about a 13% gain, so I think that's pretty good (much better than the bank, and no tax implications when I withdraw it….)

    Best of luck with your search.
     
  18. S0805

    S0805 Well-Known Member

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    thanks KayTea. Didn't cross my mind that you could have used Fin Planner.....I'll keep digging..:)
     
  19. property world

    property world Well-Known Member

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    So would you recommend an offset account or not?

    Based on everything
     
  20. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Yes definitely would recommend using an offset but an offset should only be used for storing cash, income etc. Not borrowed money.