IP Offset Account Deductibility after Multiple Use Withdrawals

Discussion in 'Accounting & Tax' started by bamute, 8th Sep, 2020.

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  1. bamute

    bamute Active Member

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    Here's the scenario

    Have equity in an IP
    Create offset account using the equity
    Use the equity to buy dividend paying shares. The interest is tax deductible.
    Place cash savings into the offset account so it is full and the interest on the loan is zero
    Take all funds out of the offset account and use for personal reasons.

    Is the interest for the offset account tax deductible?
     
  2. Paul@PAS

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

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    Q Is the interest for the offset account tax deductible?

    A : An offset account doesnt charge interest. The loan will have interest charged.

    The loan interest is possibly partly or fully deductible. Many issues could mean its not. Eg can you demonstrate (in the future to the ATO) that all borrowed money (from the loan) was directly used to acquire shares without mixing with savings etc at any point ? A common mistake is parking funds in a offset which could be mixed with other money or then transferred through another account to get to the broker.

    The interest would be deductible against dividend income, not property income of course.

    I recently encountered a issue along these lines. Shares trades used borrowed $$$. The sale of shares several months (pre-covid) ago sat in the CBA CDIA and didnt produce income (0% interest on a Commsec trading linked CBA account) . The loan was not paid down. My view was the loan interest ceased deductibility when the shares were sold. Client didnt like that. We asked a third party advisory service. They agreed with me.

    TR 2004/4 contains the prior and after use principles. This is consistent with the use of borrowed money being deductible. Once the use ends the deduction ends.
     
  3. Terry_w

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

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    How do you create an offset account using equity?

    No interest would not be deductible.
     
  4. Paul@PAS

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

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    I assumed the offset consists of newly borrowed funds from a property equity release loan. And that the loan was split from existing borrowings. And that split has a offset linked.
     
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  5. Terry_w

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

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    Sounds to me like parking borrowed money in an offset account and then paying this off by putting cash in the offset and then withdrawing the cash and using for the personal expenses
     
  6. bamute

    bamute Active Member

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    Thanks for the replies. Here's some more info.

    Correct.

    Yes, 100% deductible. The funds from the loan were deposited into the offset account and then used to purchase shares which have never been sold. The funds were never mixed with any other savings.

    IP has gone up in value. Create a loan for 80% value of the equity. Loan has full offset account attached. Loan created and funds placed in offset account. This was done to avoid using a redraw account. Is this what you mean Terry?
     
  7. Paul@PAS

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

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    Precisely why we both say :
    Possibly means the post lacks detail and is really where personal advice is best. I probably deal with 1-2 such client discussions every day. Cant recall every charging a client for this guidance. But I often get non-clients who ask and I cant assist

    I see new information indicates what I thought rather than terry thought.
    The devil will be in the detail on how the $$$ ended up with broker. I often get told that clients cant Bpay froma offset. So they move the $$$ from the offset to their savings and then pay the broker. Not good. Very best method is to Bpay or EFT direct from the loan to broker.
     
  8. inertia

    inertia Well-Known Member

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    Slight tangent, but still relevant.

    How do (should?) you move the money to actually buy the shares?
    Is below correct?
    - split loan to the amount you want to use (eg $20k)
    - pay down the split (Q: how much? paying 100% may result in that split automatically closing. Can you pay down $19999? Do you need to account for the 0.005% not used for investing in an income producing asset for tax p?)
    - redraw the split to an account accessible to the trading platform(can this be to an empty account, ie no mixed funds, and still maintain the deductibility?)
    - use trading platform to buy income producing shares

    Is there any issue with settlement delays wrt tax deductibility? I can redraw and have the funds immediately available, but it might take a day or so to get to the trading platform, then be able to make the trade, then settlement in 3 days... any tax deductibility implications?

    Cheers,
    Inertia.
     
  9. Terry_w

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

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  10. Mike A

    Mike A Well-Known Member

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    unfortunately came across this same issue the other week. once the deductible and non deductible portion has been determined at least you can split it from that point and preserve deductibility moving forward.
     
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