Tax Tip 1: Parking borrowed money in an offset account

The connection between borrowing and investing becomes even more distant...

 

10 pages later, if I was @Terry_w I would just edit my first post in the thread to:

"Tip: Don't do it - you'll probably stuff it up and make the interest non-deductible, despite your best intentions. Please use a LoC. The end."

I really can't believe the amount of people that are struggling with the concept.

 

Yes I am amazed at the number of people who just post in and ask the same question that I answered in the opening post.

 

Hi @Terry_w ,

Thank you very much for all your tips. I would like to confirm my understanding and check if I am doing it correctly:

I am in process of buying an investment property and I would like to ensure that I have structured my loans correctly. This is my situation:

1. I have a loan for my PPOR with an offset account (Loan 1). I have roughly 80k in this offset.

2. I have applied for a separate interest only investment loan to access my equity. This investment loan has a 'redraw' facility (Loan 2). The loan will will be around 150k.

3. Once Loan 2 settles, the bank will deposit the funds on my offset account (Loan 1) as in theory it is not possible to release the funds on the loan account itself. - Is it correct?

4. Once the funds are made available on 'Loan 1', my spouse and I will immediately move it to the Loan 2 account so that no interest is payable until we actually find the property. (This is a fixed IO loan and our broker said we could do that).

5. Once we find the property, we will redraw the amount from Loan 2 and use it as a deposit.

My question is around the issue of 'Parking borrowed money on the offset account'.

In our case, we are not really parking the money on the offset account, the account was only used to receive the funds prior to moving it back to the loan account. At the stage we find the property,(1-2 months from now) the money will be redrawn entirely from the Investment Loan Account. (Loan 2). Would this be clear enough for the ATO so that the interest from the investment account can be tax deductible? If not, what should we do instead?

I appreciate the help.

thanks

Kate

 

Kate - have a read of the last 10 pages.

 

@Terry_w, i did read the posts, and so did my spouse but we are still a bit confused. My apologies if you have been answering this question over and over again.
I believe we will be doing this: (posted by @Paul@PFI )

2. If the bank puts the $ into a offset which contains ANY other savings before you want to use them, re-bank the loan drawing to the loan AFTER checking with bank / broker that this is OK.
3. Redraw when actual proceeds are needed and draw a bank cheque or directly EFT to the solicitor etc...

However, you mentioned:

Never park in an offset is my advice.

You could borrow under a new split, paid into a clean offset account. Immediately pay back into the new loan split, carefully avoiding paying it off. Then borrow it using redraw when needed.


This is what I would like to do, but it seems the bank will not open a new offset / savings account for me. How do I control that? Do I explicitly ask them to NOT put the money in my PPOR offset? The equity release will be on my PPOR offset for a few hours. At the moment I see the funds in my offset, I will transfer it back to the Loan 2 account, so I wont pay any interest until I actually buy the property and redraw the funds.

The fact the bank will be putting the money in my PPOR offset account, will this be considered "a glass with urine mixed with another drink".?

Terry, you also mentioned:

If you pay a loan off and then redraw the money again it will be a new loan for tax purposes and deductibility will mainly depend on what the funds are used for. If paid off completely and borrowed for one purpose then no mixing either.

This is what makes me very confused.

What is considered 'parking money in the offset account' ? Would a couple of hours / 1 day of the equity release in my PPOR offset account contaminate my loan?

I have a mortgage with a small bank and communication is very difficult and slow. Unfortunately my broker does not seem to be the very savvy, although he is very responsive. I am looking for a new broker for the investment loan, but for now this chat is all my source of info.

Thanks!


​

 

If you want specific advice I can advise you over a consultation.

All the answers are above and in my other legal and tax tips.

 

I thought about that but your post signature says "Not accepting new clients this week." ?

 

Next week is only a day away!

 

Its parked as soon as the money touches that account. Why can't you use a separate offset account? Or a line of credit facility?

 

hey @thatbum, thanks for your comment.

I believe I was not clear on my initial comment (or I misunderstood my broker / he confused me)

Before I applied for equity release, I had two accounts with Bank 1:
Account 1: Offset (around 80k)
Account 1A: Loan account ( 500k mortgage - PPOR)

I applied for equity release a few weeks ago. Since I signed the docs and sent it back, Bank 1 opened another account for me. Its current balance is 0.00 and its a interest only fixed account.

So today, I have 3 accounts:

Account #1: Offset (around 80k)
Account #1A: Loan account ( 500k mortgage - PPOR)
Account #2: (0.00) - Interest Only Fixed Account.

My broker said my new 150k loan will not be deposited in my newly created Account #2, but the money will be deposited in the Account #1, (not sure why) and I will have to manually transfer it to the Account #2. Account #2 will have its balance then = 150k.

I have already applied for another investment Loan with a second bank .

In a month or so when I find the IP, I will redraw the 150k from Bank 1, Account#2 and use this money to fund my IP, along with another investor loan with Bank 2.

What are your thoughts about it? I am not sure why Bank 1, can't just release the 150k equity on Account #2 (that didn't exist until I applied for equity) so I can use it as soon as I find the IP.

thank you!

 

Can u rewrite the above and distinguish between loan accounts and savings accounts?

 

Hey @Terry_w, when you mean savings account, do you mean offset account? i.e: - is an offset account considered a savings account?

 

yes

 

Thank you for being willing to help @Terry_w , I appreciate it. I will try to articulate it slightly differently.

At the moment these are our accounts:
#1. PPoR Loan Account - the actual loan account, with the negative balance.
#2. PPoR Loan Offset Account - the offset account linked to our PPoR loan, where we keep our day to day savings to reduce the amount of non tax deductible interest we pay.
#3. Equity Investment Loan Account - This is a new loan, separated from PPoR loan that we applied to access our Equity. At the moment it has zero balance because the funds were not released yet.

The "Equity Investment Loan Account" (#3) has been setup with Redraw facility.

The bank claimed it was not possible to release the equity loan funds on the "Equity Investment Loan Account" (#3), so this is what we were instructed to do:

1. The bank will release the 'Equity Loan funds' on the 'PPoR Loan Offset Account' (#2)
2. We will immediately move the 'Equity Loan funds' on its entirety to the 'Equity Investment Loan Account' (#3) (which will then be back to 0 outstanding balance).
3. Once we find our investment property we will Redraw the 'Equity Loan funds' from 'Equity Investment Loan Account' (#3)

In other words, the deposit for the new property will be taken as a redraw from the 'Equity Investment Loan Account'.

This is the reason we are slightly confused. We are not redrawing from our 'PPoR Loan Account' (#1) or 'PPoR Loan Offset Account' (#2) to buy the new property - the funds will come out of a explicit 'Investment Loan Account' however this funds had a very brief presence on the 'PPoR Loan Offset Account ' (#2), as this is how the bank will release the funds to us.

Is this a bit clearer why we are slightly confused?

Thank you again,
Kate

 

Thanks for clearing it up a little - but its what I thought you meant before anyway, so my queries still apply.

Loan money shouldn't be going into your existing offset account, even for a split second. Use a different, completely new, untouched savings/offset account - or even better, a line of credit facility.

 

Thank YOU @thatbum! - I will get in touch with my broker first thing tomorrow and try to clarify how the bank will release the funds. When we first applied for equity release I made it clear that these funds would be used towards an IP and I didn't want the loan to be cross-collaterised , i.e. we wanted a separate loan. I am sure he has done that several times and should know all the effects in having the funds released in my offset account linked to my PPOR mortgage.

 

It doesn't matter if your borrowed money goes into an offset account with other cash as you will be repaying the borrowed money back into the loan. So any mixing previous to this will be relevant.

However when you redraw the money again, just before you invest, if you redraw into an offset account with cash then it will be mixed.

 

Thank you for that @Terry_w. I appreciate it.

Just confirming, when you said "So any mixing previous to this will be relevant" did you mean irrelevant instead?