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Parked borrowed money in offset. Don't see any problem...

Discussion in 'Accounting & Tax' started by Ravi, 16th Feb, 2016.

  1. Ravi

    Ravi Active Member

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    I have a ppor loan and an offset attached to it where my salary goes and my personal expenses paid from.

    Recently I revalued my ppor and IP and created a separate loan(call it investment loan) with a new offset (call it investment offset) attached to it. As a result new loan and offset accounts contain money that is borrowed only and will be used purely for future investment(such as paying down 20% deposit, and IP expenses etc.).

    As long as I do not use this investment offset money for personal purpose and avoid putting any non-borrowed money into this offset account, is there any problem in claiming tax deduction for interest paid on investment loan?

    I have another IP and planning to re-value it and topup same investment offset account and increase investment loan by same amount.

    Can I repeat same for future valuations of all my IPs and PPOR? That is, can I keep topping up same offset account(and increase amount in investment loan) and keep using money from this offset to buy future properties and pay IP expenses and still claim 100% tax deduction for interest paid on investment loan?


    Please can anyone please point out what I am missing and where things can go wrong?

    Assumption: I will make sure never to put non-borrowed money in investment offset and never to use money from this offset for personal purpose.
     
  2. Scott No Mates

    Scott No Mates Well-Known Member

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    You're paying interest on the money borrowed and parked in the offset. This money isn't being used for investment purposes so probably is not deductible either.
     
  3. Ravi

    Ravi Active Member

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    I pay interest on money borrowed only when I use it for investment purpose. Otherwise money will be sitting in offset account offsetting all borrowed money.
    For example, I have
    investment loan = 120k
    investment offset = 120k
    I pay $0 interest hence don't claim anything.

    Now if I use 50k from investment offset to buy new IP (or pay expenses for existing IP) then
    investment loan = 120k
    investment offset = 70k
    Now this will result in interest being charged on investment loan(loan - offset = 50k). That I can claim in deduction.
     
  4. legallyblonde

    legallyblonde Well-Known Member

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    Won't the loan be mixed.. All deductible but cannot be separately attributed to each investment
     
  5. York

    York Finance Broker Business Member

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  6. York

    York Finance Broker Business Member

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    As per Terry's tip -

    So in summary
    1. Borrowing money to part in a savings account will probably result in the interest being NOT deductible.
    2. Borrowing to park in an offset account may result in the interest being NOT deductible where the offset contains other non borrowed money. The interest could possibly be deductible in part.
    3. Borrowing to park in an offset account may result in the interest PROBABLY being deductible when the offset funds are used to invest at a later date.
     
  7. Ravi

    Ravi Active Member

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    I agree. It can not be separately attributed to each investment. But what is the disadvantage? They all are investment and I do not have plan to make any of them ppor in future.
     
  8. Ravi

    Ravi Active Member

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    As per Terry's tip item (3) above. In my scenario the interest is deductible (afa I understand). I do not understand the "PROBABLY" part though.
     
  9. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    The problem is that the offset account will have 2 different sources of funds. so when you withdraw money you will not be able to say that you have used the borrowed funds from bank A.

    Why don't you just use a LOC?
     
  10. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    And I say probably in my post because you will be breaking the direct connection between borrowing and investing. once borrowed money hit a savvings account it is no longer borrowed money. But where you can trace the funds the ATO may allow the deduction. Best to consider a private ruling to be sure.
     
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  11. Perthguy

    Perthguy Well-Known Member

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    I did the exact same setup and made the exact same assumptions as you. However, before I could invest any of the money in the offset account, my bank started depositing non-borrowed money into the account. So now the funds were a mix of borrowed and non-borrowed funds, entirely out of my control. To fix this, I transferred all the money back to the loan account and invested the money directly from the loan account.

    The other issue with this setup is if you use for more than one investment property is apportioning interest. You might just see all your investments as one bucket, but will the ATO? What happens if you sell one property?
     
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  12. Ravi

    Ravi Active Member

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    Two problems with LOC 1) higher interest rate. checked with cba 4.7% investment loan and 5% LOC 2) . Currently I have ppor + 2 IPs and 2 more IPs are going to settle in next two months. There will be to many LOCs to manage.

    Agree the interest will be apportioned .
    If I sell one property, can I just pay back same amount (same as what I used it to pay initial deposit for that property) into investment loan and reduce it by that amount?

    Why would bank deposit non-borrowed money into my investment loan?
     
  13. Perthguy

    Perthguy Well-Known Member

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    I have no idea. You would need to get specific tax advice.

    That the same question I have, except it is my investment loan offset account where the money is being deposited. I asked my bank why there were doing it and I asked them to stop. Apparently they are unable to change their system to stop non-borrowed money going into the offset account. Basically, this setup is useless to me which I why I don't use it.
     
  14. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    The LOC would only be a temporary measure. Once you have used the money for a particular property you would convert the LOC to a term IO loan.


    And then when the value of the property grows you incorporate the IO into the main loan for that property. This way you minimise loan splits. Have a read of this thread
    Tax Tip 36: Consolidating Loans for investment properties
     
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  15. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    No I don't think it would be possible to just pay back the portion of the loan associated with the sold property. There is an 'exemption' for a mixed purpose loan for a property which is sold
    see Tax Tip 55: An Exception to the rule about splitting before Repaying a Mixed Loan

    But here your loans aren't mixed, but you offset accounts.

    I have also seen multiple people attempt the parking in offset strategy and then stuff it up by either accidently placing money into the wrong account or the bank doing this.

    You might be trying to save $10 per month, but I could cost you thousands in lost deductions.
     
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  16. Ravi

    Ravi Active Member

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    It starting to make sense to me now :) @Terry_w When you plan to publish a book with those Tax Tips please let me know. I will book my copy in advance. :)
     
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  17. York

    York Finance Broker Business Member

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    He has. It's right here on this forum. Here's the link. :)

    Terry's Tax Tips

    Also as a bonus here are Terry's Legal Tips

    Terryw's legal Tips Index
     
    Last edited: 17th Feb, 2016
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