offset funds for tax deductible purposes query

hi, I recently refinanced two properties, to 100% cash out ($2.6m) - $1.8m variable at 4.15% (PPOR) and 785k 4.32% (IP) (CBA)

The funds cashed out are sitting in 8 offset accounts over 8 respective loans, ($2.6m in offset over loans of $2.6m) so currently I'm not paying any interest since effective loan balance is zero. There's no non-deductible debt to pay down, so the cash is there in offset for a "rainy day". (Better to get the cash now while the banks are still not questioning/turning a blind eye to "cashing out")

If I take, for example, $500k of the offset funds and use that for tax deductible purposes, is the interest that the loan then accumulates still tax deductible, even though the $500k was removed from an offset account (rather than the actual loan account)?

I asked the bank at time of settlement if they could leave the refinanced (surplus) funds in each of the respective loan accounts for redraw at a later date, but they said they could not, so my only option was to move it into the offset accounts. I asked if it were possible to manually move this offset money back into each respective loan account so each loan had a zero balance, but he said that may cause the loan accounts to automatically close down (which he thought he could not manually re-open & would require a further loan application!), rather than being available for redraw at a later stage for (in my case) tax deductible purposes.

 

It is the use of the funds that determines tax deductibility or not, not where it comes from.

 

So when you use the borrowed funds you will have eight new loans ? Thats fine if you buy one Ip but what happens if you use the cash to buy three or four. You are going to have a hell of a time identifying exactly which loans = which IP. Perhaps even blended loans as I'm sure you wont exactly settle all amounts precisely.

Why not deposit all but but $1 back to loan then redraw as and when required ? Then ask lender (or online) to rename each account for its property use. Check with lender first.

 

I like Paul's suggestion. It will be a mixed loan, but the % will be minuscule.

 

I have been reading Terry Tax Tips (thanks Terry), but not sure about this:

If I move the $500k in offset back into the $500k loan account, and then draw this money for investment purposes - this interest is tax deductible.

If my weekly income then goes into this particular offset account (to reduce interest) and I then draw on this income in this offset account for non-deductible/living expenses, have I contaminated the deductibility of the interest of the loan?

 

Not if the offset contains no borrowed funds. If you move the $500k from the offset back into the loan (be careful with this as the account could auto close), then your offset has a nil balance. So any funds deposited in should be fine. They are non-borrowed funds. When you draw down the loan for investment purposes, the drawn down balance incurs interest and that interest will be offset with any funds you have in the offset.

As long as the offset does not contain borrowed funds, there shouldn't be a contamination issue. @Terry_w can you clarify?

 

Did you have to provide a loan purpose to the lender to get 1.8m cash-out? Which lender provided the cash-out?

I am trying to do a similar thing- cash-out all my equity ahead of time expecting credit to get impossible in 2017/18.

However I have found the screws have already tightened and the lenders are not all so happy with cash-out without controlling the release of funds towards settlement of a definite purchase.

 

If you move money back into the loan then any prior mixing doesn't matter because when you take it out again it will be new borrowings at this point.

 

I have done similar with 3 of the big 4, including Westpac and recently CBA along with ANZ.

 

@Rayan - This was with the CBA. Surprisingly, they didn't ask about the purpose of the funds - so much for "responsible lending"! ...when I "shopped around" with other low rate lenders - BOQ, HSBC, loans.com.au ... both BOQ and HSBC asked what the extra cash funds were going to be used for; loans.com.au said money would be in "escrow" unless you signed a declaration for what the funds were being used for; NAB wanted to charge a higher % for the "cash out" above the value of the existing loan (PPOR was previously $1.492m) The CBA refinanced to 90% with no LMI (due to occupation). Also in process of refinancing another 2 IP's with CBA at 3.99% - 3 years fixed I/O (but 90% no LMI)