Offset account stuff up?

Hi Everyone,

Go easy on me please. I appreciate the knowledge you all impart on this forum but also aware this question is going to see stupid to a lot of you.

I changed banks recently and borrowed an extra $200k from the equity in my house.
It’s sitting in an offset account and we had intended on buying our next PPOR with it as a deposit. This loan was changed to a fixed IO as we had intended on renting out our original house once we moved.

I dumped $100k cash savings into the same account.

I have since had to take out $20k of that cash but noticed now on my online account there is a separate offset account sitting there and it got me thinking that maybe I was meant to put my cash into that account instead of the same offset that held the equity redraw.

I’m totally new to this so have been reading Terry’s posts and getting an understanding that I need to keep it separate to not muddy the waters when it comes to claiming any interest on the investment property etc.

My question is have I stuffed my loan structure up by touching $20k from my cash savings (that was sitting on top of the equity redraw)?
Or will the bank let me transfer over the savings into the other offset account… ?

Thanks in advance.
E

 

you would have some tax issues by fixing your loan before using it, but if is is a main residence the interest wouldn't be deductible anyway (it might be later though).

You can transfer cash between offset accounts but this will cause further tax issues.

If you didn't split the loan with you borrowed the extra $200k you would also have a mixed loan and could not claim all the interest when the current property is rented.

best to seek specific tax advice.

 

As this is from a PPOR should not be an issue.

But even if you used it for investment...so long as you keep METICULOUS records and have the bank receipt/trails...that amount used could be have the interested deducted/expensed. But you are correct keeping the investment side away from personal spend would have a clearer delineation.

 

Thanks Terry. I appreciate the reply.
I will seek tax advice.

 

Thank you I definitely would have preferred to keep both separate. I guess while it is still a PPOR I can transfer the rest over. My mistake won’t do that again!

 

No mistake yet....but call the ATO and they will also advise about keeping meticulous records. Make sure you have an accountant who can argue this well and you have the records and it should be pretty straight forward.

 

If you have done what I think you have done this will make it worse.

 

Ok I haven’t moved anything else yet.
Maybe I should restructure my loan as I will need to access that cash.

 

Calling the ATO is a waste of their time and yours. Meticulous records are not needed and a tax agent cant talk their way out of a blended loan. What is needed is records that demonstrate that the borrowed funds (from a loan) are then used to acquire a interest in property or make improvements etc. You also need to retain that proof showing the USE of aALL the borrowing for that use. Lose paperwork and its a issue. I have seen it for just a few hundred dollars as part of a larger loan eg new blinds. . When the borrowing hits a offset and is bledned with other funds it dilutes the deductibility when it is used and can over time lead to a inability to even work out what the % is. And records cant be "fixed". Its like asking for a choc a milk shake and then asking for the flavour to be taken out. The ATO also wont guide how to do this..Their job is to administer tax and not to give advice. They have a ruling (several actually) on this issue. That the limit of their guidance...to share their view on the concern. And then to cancel overclaimed deductions. And iimpose penalties and interest.

That is where personal tax advice kicks in. We are presently dealing with three review client who have loan issues. Two of them I know are fine. One isnt. They had a bledned loan and the ATO are now expected to reduce / cancel deductions and we had to give advice to this taxpayer on how they made a mess of it and while they can fix it to stop it getting worse, they cant unwind their mistake.

Some loans can be fixed before an issue. Some cant. Some can also be fixed to limit it getting worse but that doesnt help the past. Just last week I had someone with a problem and after discussion they sought legal advice on documenting a refinance from a parent that was tenporary. When they repaid the parents it would be non-deductible but with a loan agreement it is a ctually justa refinance provided the sum borrowed didnt change. It was real and happended but wasnt recorded anywhere. They have corrected that oversight.

Those loans that can be fixed can often be corrected through redrawing or unwinding the funds and then doing it right when the funds are used. Loan splits also need to be well managed as well as how offsets are used. Even two loans with one offset intended for two different properties can be a problem. Just because they may both be deductible so its still 100% deductible doesnt mean its OK. One ay stop that use and trigger the issue. But its easily fixed.

Tip 1 : Never mix borrowed funds and savings. In a savings, cheque, offset or another account
Tip 2. Dont borrow money in one name and park it in any account in another name without tax advice. Its fine if Mrs borrows and MR & Mrs buy property but if Mrs Borrows and Mr is the buyer its a fatal issue.

 

Interesting question further on this topic :

If there were 3 IPs here :
IP1 : In name of Mr & Mrs (Equity Drawn : $150K)
IP2 : In name of Mr. (Equity Drawn : $60K)
IP3 : In name of Mr. (Equity Drawn : $100K)

Would we be able to use the full amount of $310K as a deposit on another Investment property and receive 100% deductability for interest as a result of the redraw?

One of the three of the above Drawdowns have already occurred and the funds are sitting in that HL offset. Mr redrew and it's sitting in the offset for that same HL.

 

It depends if 'we' own the investment property. Generally the owner of the IP would claim the itnerest

 

OK Paul....

I have a different perspective...keep all funds in a Offset transaction account for all IP.

I subscribe to the KISS principle. Use only one of these for day to day transactions.

 

Thats a risk. Blended offsets mean to originating loan is compromised unless 100% of the funds are borrowed AND 100% of the funds are used to acquire one property AND the owner of the property is the same person/s as the loans (subject to some conditions for spouses) . You can also have blended original loans if the new equity is not its own split.

If the offset is used for other trasactions and isnt 100% savings ideally offset to a PPOR non-d loan YOU DO have a issue. It wasnt as simple as you thought ? . I havent met many who can explain to me what blended loans means in full. Multiple offsets can be a winner but not all lenders offer then and some clients dont want the higher rate and fees that go with it. So they shortcut. One offset.

The default ATO process for a rental review is to seek ALL loan account statements and continually trace them from acquisition and settlement and then all the way after looking for all debits to the loan that increase the sum advanced. There is no minimum value. That could be ten years and thats fine but they will only seek to amend 2-4 years usually. Each of those debits needs supporting proof or its blended. Buy another property, its blended. Private use, its blended. No receipts or paperwork its blended. The argument both properties are deductible doesnt work. They will adjust one up $40 and another down $40 if its not right. hey are pubic servants and dont care if it takes time. Its their job. They want to see accuracy. Not simplicity. If any loans funds hit a offset or savings it a concern they also then consider that account. Often that is also blended . Or worse it hits savings. . Offsets used for spending are also a problem. Even harder to fix and calculate. They can create a blended-blended loan. More often than not it is declined deductions. No two are actually alike. One of the best offset mechanisms is TWO offsets. One for the IP and other for the non-deductible home. Then you can keep it simple by never crediting rental income to the rental offsets and only use use the offset for borrowed funds that are spent for same property. The non-ded offset used for private matters. Debt recycle the PPOR loan as a new split and use it for ONE specific purchase. Lenders will always credit new money to somewhere you wont want it and must then fix it.

The ATO will then offer you one chance to show them an apportionment / adjustment calculation and if they agree it will be adjusted. They wont assist or guide it beyond a simple explanation of what they need. If they dont agree or they think its beyond understanding or just wrong its 100% declined for the blended loan bits. Penalties can also be applied. Then you must lodge an objection and demonstrate a basis they do agree on. Thats even harder to get through.

The ATO call these loans "mixed loans" in their new more aggressive review underway. They are comparing the loan settled at purchase in 2020 and 2021 with interest deductions claimed and where the deduction is more they are seeking review for the issue. I am being bombarded by affected taxpayers who dont use a agent who go looking for one who deals in property and knows the issues (thanks PC for the google searches) and so far have refused to assist them as they dont appreciate the time involved. The ATO are also looking at repairs in the year acquired and large value repairs in other years at the same time. And checking the lease and how its managed. Self managed get special attention to market rent and who occupies incl proof of receipt of rent. And asking for copy of each QS report.

 

Ok wow … not even sure what my next move is now after reading all of this!

 

Its rarely that complex. But some are.