Must be late on Friday but trying to make sure I have this right (please note that figures are rounded for simplicity) Loan = $800,000 Interest Rate = 4.49% Offset Amount = $500,000 Interest Payable on full loan amount = $35,920 p.a. Interest Payable on full loan –offset amount = $13,470 p.a. Interest saving due to offset = $22,450 p.a. Now considering top tax bracket (0.45c/$) and Medicare Levy (0.02/$), you would need to make $47,765.96 in pre-tax dollars outside of this structure to make it worth your while using the $500,000 anywhere other than the offset account. That’s a before tax return of 9.55%. Do I have this right? Considering your risk profile, offset account seems a pretty good option. Thanks
OK - good point. No I was talking about IP so interest is deductible. Assume PPOR is debt free. I think this is where I need to reduce the $47,765.96 earned outside of offset (assuming you can get 9.55%) by the interest payable by not having the $500,000 in the offset i.e. $47,765.96 - $22,450 = $25,315.96. So tax payable would only be on the $25,315.96, not the full $47,765.96. This would then bring the target return down from 9.55% to be equivalent to the benefit of the offset account. I am sure some clever person would be able to figure this out but the concept is what I am trying to get a handle on. Thanks for the replies. Have a great weekend
If it is deductable then the interest you save by offsetting will be taxed. Because your rental income minus expenses will increase by the amount of interest you have saved. Usual disclaimer. I am not an accountant or tax advisor. This is not advice.
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