Offset account - expenses

This has serious tax consequences if you ever rent the property out. You could have a large loan with no interest deductible. You should only use a LOC for equity release - nothing more.

Tax Tip 20: Never use a LOC as the main loan
https://propertychat.com.au/community/threads/tax-tip-20-never-use-a-loc-as-the-main-loan.2928/

 

Was hoping you'd chime in Terry, I was talking about using the smaller $100k LOC for investment purposes only, which seems to agree with your thread?

I think I see what you're implying though...

Must the $700k loan only ever be paid down (and never drawn back up) in order to preserve the purpose as being a loan for that property? (and not for day to day, non-income-producing expenses?)

 

Yes that could be an option - having a small loan split which could be paid down and reborrowed as in
Tax Tip 13: Simple Loan Structuring Strategy

But the ideal would be to pay IO with offsets saving the excess funds. These funds could be held outside the loan until it is decided to invest.

Once you decide to invest the best approach would be to keep the cash and borrow further against the property to invest, but where there is not enough income you may have to pay down the loan and reborrow to save non deductible interest.

 

Thanks Terry. Tax tip 13 is super helpful for my situation as it's my first time using a LOC package (have always been IO + offset in the past.)

Seems like the LOC package is a double edged sword... the benefit is immediate rebalancing of loan limits, but the downsides are ease of contamination and, in the case of my particular LOC product, no offset facility to dump surplus cash (which means the future deductible base will be nibbled down)

 

I've always thought the problem with a LOC is that the bank can simply change their mind / policy and suddenly you can only get 70k of that 100k.
In an offset acc the bank can't do that.

 

That indeed would be an unpleasant surprise... if the LOC has $100k available then $100k can be withdrawn at any time, however you're saying the bank can (without notice) reduce the limit to $70k?

 

Yes that is a problem too. LOCs are genearlly at call.

 

This is likely to be the case - some lenders have similar clauses on redraw too, but I have never seen or heard of it being implemented.

LOC's also tend to have a lovely little condition that makes them repayable on demand. For risk management I tend to switch them to a normal SVR once the funds are drawn. Many lenders have normal term loan accounts that you can transact directly out of which can be a good alternative.

Ha - Terry beat me to the buzzer

 

Currently sitting here wondering what the hell I've gotten myself into.

Appreciate all the humbling advice....

 

Sorry to draw this slightly further off-topic (although it is good discussion for the pros of offsets!) but is this a simple procedure in the current climate? i.e. converting a LOC to SVR? I have one in particular that is 97% drawn (on investments). Will converting maintain purpose and tax deductibility?

 

Yep, everything else remains the same. It's essentially a refinance so doesn't affect anything tax wise.
How simple it is depends on lender - some charge a fee, but often this is waived under package.