Tax Tip 1: Parking borrowed money in an offset account

Discussion in 'Accounting & Tax' started by Terry_w, 12th Jul, 2015.

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  1. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Latest Bantacs newsletter covers this tip
    Keeping Your Interest Tax Deductible
    Did you know the simple action of drawing down a loan into your offset account ready to pay for a property or renovations can render the whole loan no longer tax deductible?! You can’t fix this once the money is paid to the seller or builder. But you can if the money is still in the offset account, by transferring it back into the loan account and then paying the seller or builder directly from the loan account.
    Read all about how Wilma Domjan was caught out and other use tips
    https://bantacs.com.au/Jblog/keeping-the-nexus-between-the-borrowing-and-the-expenditure/#more-352
     
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  2. Pash81

    Pash81 Well-Known Member

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    Previous loan balance $300,000
    Refinanced the loan and new loan balance is $330,000.
    Bank sent me a bank cheque for $30,000 surplus.

    Whats the best way or how or where to park this bank cheque to be able to invest in a months time and be able to deduct the interest against any future income?
     
  3. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    See above
     
  4. Pash81

    Pash81 Well-Known Member

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    So i can keep this money in any account (like a personal saving account) for a month. Then deposit this money back in the actual loan account and then withdraw from the loan account to purchase shares?
     
  5. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Seek tax advice on the consequences
     
  6. Pash81

    Pash81 Well-Known Member

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    Is there any time limit within which the money should be invested, to be tax deductible, after the equity release? The money is sitting in a clean offset account without any mixing.
     
  7. Pash81

    Pash81 Well-Known Member

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    @Terry_w Is there any time limit within which the money should be invested, to be tax deductible, after the equity release if the money is sitting in a clean offset account without any mixing?
     
  8. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    my advice, if you were a client, would be less than 24 hours.
     
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  9. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    It isnt creating a deductible purpose at that time (since the offset is 100%). When the funds are paid from the offset it is best it be direct. Timing itself isnt so much the concern but can be. Generally where the use of the borrowed $$$ is expected to produce income that al it takes. It doesnt need to be today or next month. Could be June next year. But aftre that it could strat to be questioned if the investment produces "income"

    To avoid all doubt I will agree with Terry view but it isnt absolutely required in all cases.
     
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  10. Pash81

    Pash81 Well-Known Member

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    I refinanced one of my loans with ANZ and took out around 30k equity. ANZ sent me a bank cheque for this amount.

    I have deposited this 30k cheque in a savings account with Suncorp bank which doesn't have any other monies. So it's this account only have this 30k in it. This was deposited around 3 weeks ago. Now if i transfer this 30k to my nabtrade account to buy shares, will I be able to get deduction for this 30k?
     
  11. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    I would say no.
     
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  12. Pash81

    Pash81 Well-Known Member

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    If i deposit this 30k back into the ANZ home loan account and then redraw it few days later to buy shares, will the interest be deductible then?

    Only thing i have to figure out is how to transfer funds from ANZ home loan to nabtrade account.
     
  13. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    This has been discussed on the proceeding 12 pages here. 'It depends' is the best answer. 'perhaps' is another.
     
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  14. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    If the suncorp sav account pays interest I would say yes. It is deductible. If the savings account blends with other money or pays no interest its not so clear. A offset of $30K against the loan split for the $30K would be far smarter since no interest is generated to then ask the question.

    The purpose of the $30K borrowing is then to produce investment income (interest). There is no test for profitability that applies to this savings account. If the account pays 0.01% it produces income that can offset the borrowing expense. That said its seems illogical to pay 4.5% to earn 0.01%. A offset is far smarter. ie earn no interest, pay no borrowing interest.

    When the funds are drawn from this account to actually invest the purpose of the borrowing shifts from a interest bearing bank account to shares (provided the shares are income producing). The purpose of the original borrowing has actually changed so the deduction is no longer a interest income expense but a dividend expense.
     
  15. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    It could only potentially be deductible up to the interest that the Suncorp interest paid.
    At the very least you would not claim the interest on the $30k while it is in the suncorp loan and then pay the money back into the St G loan, redraw into an empty offset and on the same day transfer from there into an empty brokerage account and then buy income producing shares.

    Then you might have an arguable case to deduct the interest.
     
  16. Pash81

    Pash81 Well-Known Member

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    Sorry for the confusion but this account in Suncorp where I've put 30k actually offsets another home loan with suncorp
    Does this offset account need to offset the original loan with ANZ from where I have taken the equity out?
     
  17. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Yes because if it doesn't you will be incurring interest on one loan but offsetting another unrelated loan
     
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  18. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Good example of a simple question resulting in further information that indicates its easy to create a mess. Most blended loan and offset/savings parking in accounts questions have similar issues.
    Lesson : its easier to do it right than do it wrong and then ask if its right by providing some information.

    Tip : DONT park borrowed money in offsets OR savings accounts. Its better credited back to the originating loan (assuming is has redraw) and then when it is needed you draw the funds for the new required deductible purpose. Ideally directly to the payee (eg Commsec, lawyer for property settlement etc). If you dont have redraw, an offset linked to the originating loan is second best provided NO OTHER MONEY is credited.
     
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  19. Pash81

    Pash81 Well-Known Member

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    Thanks a lot Terry and paul.

    The problem is that the ANZ product (simplicity plus) i have does not have an offset account. So i will have to deposit the money in the home loan account and then some how redraw straight direct into the share trading account.

    Does the brokerage account have to be empty?
     
  20. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    You have a choice
    a) run the risk of ruining deductibility of interest, or
    b) take steps to avoid it

    If the brokerage account is not empty you would need to apportion the interest.