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SMSF Loan with/without offset account?

Discussion in 'Accounting & Tax' started by JK200SX, 1st Sep, 2016.

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  1. JK200SX

    JK200SX Well-Known Member

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    In the process of getting loans etc setup for a property purchase through an smsf, and looking at the pro's and cons of using an offset associated with the loan.

    So, the scenario goes like this:
    - the 70% loan will be $269,000 at an interest rate of 5.56%.
    - The Interest on this loan will be $14956/annum.

    Lets assume I have another $10k funds available. Do I put it in the offset, or do I purchase (lets say shares).

    - If I put it in the offset, the interest per annum would be $14400, a saving of $556 per year, or
    - If I buy shares.... lets say Westpac...for 10K, you could buy 338 shares. The 338 share gave a total of $1.88 dividend per share over the last year, so that works out to be $635 in divivend payments.

    So, aside from the upside of $79 for the year, is there any other benefit in doing this, rather than leaving the money in the offset? I know people talk about tax credits,etc, but not sure how they work.

    I know this is simplified, but just trying to understand the concept.
     
  2. tapouttim

    tapouttim Member

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    Step 1 fully understand the banks definition of the offset account .

    When we originally set up our SMSF we put our excess cash in an off set account connected to our loan account only to find out 6 months later when i could not get the maths to work that the there is no offset to fixed interest loans.
    2 and half years later put all the cash back into the 'offset' account when the loan converted to variable . 2 statements later made enquires when i could not get the maths to work, to be told that the partial offset amount was 0.7 0f the current cash account rate and not the 5.69% of the corresponding loan that i had assumed.

    Basically 7/10 of SFA. Money out again.

    My Bad . Assumed did not specifically ask.

    You need cash in a SMSF but you need to make it work.

    Tim
     
  3. Colin Rice

    Colin Rice Mortgage Broker Australia Wide Business Member

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    Thats typical with all fixed loans with a few exceptions.

    Sounds like St George. They have 3 different offset account products and the true one is called a Full Offset account from memory.
     
  4. tapouttim

    tapouttim Member

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    correct , burnt by the dragon
     
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  5. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Its important to have an offset on a SMSF as once a loan is paid down it cannot be redrawn. You will have rents coming in and employer contributions etc going in.

    You might intend to buy shares, but you would only do this when you have a certain amount of money - so as to save on transaction costs.
     
  6. JK200SX

    JK200SX Well-Known Member

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    Thanks for the replies so far guys, but lets just assume the offset is the full offset, and you have cash for the shares..... Can you provide me some infor in regards to the original questions please?
     
  7. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Should you buy shares? That is financial advice and only a financial planner could help you - or yourself.
     
  8. Scott No Mates

    Scott No Mates Well-Known Member

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    What does your trust deed require you to do?
     
  9. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    The best benefit I have heard for offset with SMSF proeperty is 3 fold

    1. Redraw isnt possible
    2. An equity draw isnt possible
    3. Using the accumulated or paid down equity witthing the SMSF property isnt possible

    Add all those 3, youd have to be brave or have a very specific exit strategy to refuse a facility with a PROPER offset acct.

    ta
    rolf
     
  10. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    It would be unlikely it would require the trustee to buy shares - but it might!
     
  11. Colin Rice

    Colin Rice Mortgage Broker Australia Wide Business Member

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    You may be able to change the offset product to the correct one.

    Bank employees often do things with no thought to your specific situation. After all they get paid the same whether they do a good job or not!
     
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  12. JK200SX

    JK200SX Well-Known Member

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    Guys,

    i appreciate all your comments, but I'm just after a straight forward answer only within the realm of what I've asked. Basically given the situation I described above is it better to have 10K in the offset, or 10K invested in a fully franked share such as Westpac. I understand the real answer is more complex than what I think it is, but just trying to get an understanding of what franking credits etc do in such a suituation and how they benefit you.

    Thanks,

    JK
     
  13. Brady

    Brady Well-Known Member

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    Incorrect

    Straight forward answer would be advise.

    Which option do you like? Which has a better $$ return for you
     
  14. Colin Rice

    Colin Rice Mortgage Broker Australia Wide Business Member

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    Not all but many :) based on personal experience and also feedback from clients.

    CBA are great at suggestions that are transactional not strategic. Could rattle of real life examples but lets not go there!
     
  15. Scott No Mates

    Scott No Mates Well-Known Member

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    Not all companies offer franked dividends.

    If a company pays franked dividends (usually 30% or as declared), then you gross up the dividend by the tax rate paid by the company. You then apply the 30% prepaid against other tax due).

    Eg $10 franked dividends = 10/(1-30%) = $14.29 gross with a tax credit of $4.29 which is applied to the liability of the smsf.
     
  16. Scott No Mates

    Scott No Mates Well-Known Member

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    So using your example:
    $10000×5.56% = $556 interest (saved if 100% offset) or
    338×$1.88/(1-30%) = $908 income & including tax credit of $178

    Now here's where it gets messy (shoot me down if I'm wrong):

    Tax saving if offset is used: $556×15%=$83 vs
    $908 income, $136 tax payable on income & $42 tax credit to be applied against any other tax liability for the smsf.

    Both scenarios, offset or shares, are redeemable for 'cash' for other investments within the fund but the shares are a growth asset vs cash at 0% (or shrinking at cpi).
     
  17. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    This will depend on which gives you a higher return. Will the return on the shares exceed the amount of interest payable on the loan?

    You need your crystal ball for the shares.
     
  18. euro73

    euro73 Well-Known Member Business Member

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    Crazy to borrow for an SMSF without using an offset. C R A Z Y
     
  19. tapouttim

    tapouttim Member

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    agreed
    As the man said
    "oils ain't oils"
    shares ain't shares
    and offsets aint offsets

    know your product
     
  20. JK200SX

    JK200SX Well-Known Member

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    Why?