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Paying interests using my off set account money

Discussion in 'Accounting & Tax' started by Jat, 6th Jun, 2016.

  1. Jat

    Jat Member

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    Hi everyone, I'm quite new to the group but I couldn't find the answer to my question using the search.

    I have a few loans paying interests only. I also have an off set account with equity from one of my properties. The interests are debited monthly from my personal bank account.

    I'd like to pay interests using money from my offset account.

    I understand that's not a problem and it will be tax deductible however I want to double check if I just can transfer the money from my offset account to my personal bank account and wait until the interests are direct debited by the bank?

    I'm asking because I read that if I transfer the interest money from my off set account to my personal bank account (where the interests are direct debited) the interest ATO may consider that's not tax deductible because it mixed with personal money. May be I got that wrong and I'd appreciate any insights around that.

    Thanks in advance
    Jat
     
  2. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Sounds like you might have an offset account with borrowed money in it - which is potentially dangerous.
    Tax Tip 1: Parking borrowed money in an offset account

    if this is the case and if you then use this borrowed money to pay interest you would be 'capitalising' interest which is also potentially dangerous.
    Tax Tip 16: Capitalising Interest

    And if you transfer borrowed money into a savings account with other cash you will ruin the deductibility of interest by mixing
    Tax Tip 63: Don’t cause borrowed funds to take a detour

    Do a search on Domjan v Commissioner of Taxation [2004] AATA 815 and find how Mrs Domjan did a similar thing and caused herself problems.

    In Summary don't do what you are proposing and seek tax advice on what you have already done.
     
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  3. Jat

    Jat Member

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    Hi Terry, many thanks for your reply, those links have a wealth of knowledge and explained a lot.

    After reading them it triggered another question related to Tax Tip 63.

    A few months back I changed the investment property from one bank to another bank. in the new bank they refinanced the loan and they deposited that money to my personal bank account! (I didn't know that until a day later) immediately after I asked them to create an offset account and I transferred the founds there.

    That means that money won't be tax deductible because it passed through my personal bank account? There is anyway I can fix that?

    Thanks again
    Jat
     
  4. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Hi Jat

    Yes that is right.

    I have a client right now where this has happened and we are trying to get the bank to reverse the transaction so it never happened. This is the only way to fix it.
     
  5. Jat

    Jat Member

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    Thanks Terry
     
  6. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    A bank (which bank - CAN ?) did it for me but woahhh what a deal. They only agreed as THEY decided they didnt want to maintain offsets and just cleared all offsets to a redraw with a nice letter. I ended up giving written advice that the long term loss of deductibility would leave client with reduced tax benefits and then client went ombudsman with it. Bank agreed to undo 3 years of entries. ATO agreed that approach was OK which really surprised me...And allowed extra time to amend too. Bank paid our fees.

    ATO has no power to ignore a factual transaction
     
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  7. neK

    neK Well-Known Member

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    When refinancing ALWAYS have a completely empty account or newly established account for the purpose of holding "additional" funds.

    I've found that banks generally don't like to distribute money as per client's wishes... they want to distribute to 1 account and they aren't negotiable on that.
     
  8. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Yes, best to assume the will get it wrong.
     
  9. Otie

    Otie Well-Known Member

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    So is it okay if the bank deposits the money into a completely empty personal bank account with a zero balance, and I can then transfer the funds directly back into the loan split accounts?
    I would then re-draw directly out of the loan split accounts (not offsets, actual loan accs) to pay funds direct to IP deposit etc, SRO, etc?
    The bank is telling me that they can't deposit the funds into the newly created loan accounts as they will not exist until after the funds have been drawn down (well that is what I think they mean).
    They wanted to deposit into the PPOR offset, however I said no, and after they said they couldn't leave it all in the actual loan accounts they have said they can deposit into a personal bank account.
     
  10. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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