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tax implications of Offset and non-offset accounts

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

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  1. Daniel Jurin

    Daniel Jurin Member

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    I am keen to buy another investment property and I have been approved for a loan by Liberty. Liberty has just valued my PPOR and there is enough equity in the house to get the funds I need for the deposit. So, if I refinance with Liberty I can draw the equity and get a loan for a new investment. However, I am currently with A big bank ( who won't give me any more funds) and I have $280,000 in an offset. Liberty as a lender does not have an offset feature. My concern is, if I borrow from Liberty and therefore put my 280,000 into an account with them- will it be considered, for tax reasons- as now permanently attached to my current PPOR? I very much want to keep this $280,000 as flexible, accessible and not commit it to a property. Liberty has talked of an "all in one" account- meaning; I can access the 280,000, but if it is not officially an offset account is that good enough for the tax office?

    I have posted a few questions on this forum over the past 6 months and I am very grateful for the advice I get. The experts on here are very generous and helpful.
     
  2. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    An offset is just a savings account. But with a difference., The credit balance is treated as a reduction in the loan sum so that the original loan is charged less interest (in place of paying interest on the savings balance)

    When an offset is used its critical to look at what type of loan its linked to:
    1. A PPOR loan. The best as it reduces non-deductible interest
    2. An IP loan....Second best as it reduces the deductions for tax purposes.

    I suspect your bank sees your $280K as savings and are assessing your capacity based on the full loan value. Have you looked at paying down the $280K and taking a new loan on the PPOR for deductible use ?? The bank may take a different approach if you reduces outstanding sum and allow equity access.

    You are right to be concerned with taking the $ liberty and blending it with other savings. DO NOT DO THAT. Is the Liberty facility a LOC or a account where you can draw it later ?
     
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  3. Daniel Jurin

    Daniel Jurin Member

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    Thanks Paul- the Liberty is an account where you can draw down later.

    With your advice of paying down the current loan- I don't want to do that. I want that 280,000 accessible and loose and able to be moved.

    Also, I am not convinced that the current PPOR is where we want to be in the future- great views but no yard for my kids. So, it is another reason I don't want to pay money into this house. Thanks for your input, I appreciate your advice.
     
  4. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Sounds like it is a loc which is preferrable to an offset account for this situation.

    See tax tip 1
     
  5. PatSyd

    PatSyd Member

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    You perhaps already figured this out. However, just want to point out offset is always better than redraw.
     
  6. PatSyd

    PatSyd Member

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    I believe an offset is a transaction account and that's why you don't pay tax because you don't earn any interest.
     
  7. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    You can't really say that offsets are better than redraws - they are different products and using redraw can be better than using an offset in many instances.
     
  8. Tom Alaka

    Tom Alaka Member

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    also, offsets a much worse idea if people are poor savers - perception (plus perhaps reality maybe pending redraw terms) that easier to dip into offset that redraws.
     
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  9. dabbler

    dabbler Well-Known Member

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    Check it out carefully.

    I think it is not a real offset, I think if you put in what they call an offset, it will reduce the loan amount, then when you draw it will raise the loan again, which will not pass Terry's tip rules at least.

    Try it will a small amount, say 100 or whatever they allow, call them, get them to confirm the change, then check online what is says in regard to you account, see if the total loan has decreased.
     
  10. PatSyd

    PatSyd Member

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    For example? For redraw you have to pay fees?
     
  11. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Example

    $500,000 loan on main residence with $100,000 in redraw and $200,000 in offset.

    The peron needs $100,000 to invest in shares.

    Option 1. Take from offset
    This results in $4000 pa extra interest on home loan. Interest is not deductible.

    Option 2. Use redraw
    $100,000 taken from redraw. $50 fee.

    Home loan interest increases by $4000 per year. But this interat is deductible becuase funds used ti invest in shares that pay dividends.

    Option 2 results in $2000 in pocket per year approx.

    Over 30 years thst is a fortune. The one of $50 fee is insignificant.
     
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  12. PatSyd

    PatSyd Member

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    Thank you for the example. A very good one.
     
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