Do I have this right?

Discussion in 'Investment Strategy' started by Tony, 14th Jul, 2017.

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  1. Tony

    Tony Well-Known Member

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    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
     
  2. Hamish Blair

    Hamish Blair Well-Known Member

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    Right idea to gross it up by 1/(1- marginal tax rate).

    Presume PPOR as interest not deductible?
     
  3. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    investing in your own non ded mortgage has always been a nice safe boring return

    ta
    rolf
     
  4. Tony

    Tony Well-Known Member

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    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
     
  5. pommy

    pommy Well-Known Member

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    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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