Tax Tip 1: Parking borrowed money in an offset account

Hi guys
I have an example that I’m wondering your thoughts.
If I have a split acc (100k) and I draw those funds into a clean offset (which offsets the same split), will it all be tax deductible if I dollar cost average into the shares over the space of a few months? I know the better way would be to redraw it out as you need it but if your halfway through doing this process would it be fine to keep it going or would the better option be to sell the shares and put all the money back into the loan and draw it out as you need it?
Asking for a friend

 

Assuming you think the parking strategy is acceptable, you can consider parking of money into an offset account as similar to being a LOC. You can borrow to buy shares in stages simply by drawing the funds out.

 

If the shares are bought at different intervals then how will be the deductible interest calculated relating to each parcel of shares?

 

The loan is $30K and the offset is $30K. Zero interest occurs.
As the offset is used for the deductible purpose (eg buy shares) the offset falls so interest is incurred on the portion drawn. Like a LOC. Interest isnt deductible "per parcel of shares" and is deductible against all income produced. Item D7, D8 usually. Sometimes against Foreign income or Item 13 Trust income

 

And i assume the money should go straight from offset account to a zero balance share trading account?

 

If the owner of all the shares is the same it won't really matter if you get it wrong, assuming all pay dividends

 

Doesnt need to be zero balance. Let me explain.

If the trading account had $13K as proceeds of sale of other shares and then you add $10K and buy $23K of shares its all deductible prupose proceeds. ie the $10K borrowed

If the share trading account had $13K of personal savings added and then a new $10K borrowed then bought $23K of shares thats also ok since the deductible portion is just $13K.

Its all based on how the borrowed $$ are used in a share trading account. It limits your ability to blend it into a problem. The one way you can make a mess is buying shares that dont pay income

 

So I spoke to ANZ and they are saying that the funds can't be redrawn to an external account. I can either open an ANZ transaction account to get the funds deposited into that account or I can get the funds as a bank cheque.

If I want to move these funds to my share trading account what's the best option in terms of making these funds tax deductible:

Move to an empty ANZ transaction account and then transfer to share trading account?

Or

Get a bank cheque and deposit it in the share trading account?

Thanks.

 

You keep asking the same questions. See above

 

Paul, Terry,

Despite your posts on this subject I am still concerned I have got this process wrong and am now in my own head in a big way – really hoping you can assist.


Situation:

700k loan was settled into a new offset account. No other monies have touched that offset account.

Approx 140k of shares have been purchased since loan settlement 6 weeks ago. The movement of funds for these purchases has been:

Offset account --- > CDIA Account (Commsec settling account) --- > Settlement (usually 2 days later)

Other Fact:

Interest on the offset account is paid out of a different account to avoid capitalising interest

Dividends earned form the shares will be paid into a different account to avoid contamination and pay down non deductible debt

Current Situation:

I now have 560k of funds sitting in an offset account, there has been no contamination however (re)reading your comments I am concerned about the nexus due to time. In theory I was planning on keeping funds in the offset account for years and slowly purchasing over time.

What should I do?

1. Do nothing – although the offset account set up is not ideal, I haven’t interfered with deductibility (yet??) and just keep doing what I’m doing

2. Transfer the remaining balance (560k) in the offset account back to the loan account. Then every time I buy shares redraw out of the loan account into the CDIA account (aka render the offset account useless)

3. Start again, sell my shares (this is expensive/annoying) transfer the proceeds + the offset balance back to the redraw account and then repurchase shares by transferring from the loan account into the CDIA account.

4. Completely start over, as in pay off the loan and re-apply

5. Other?


Bit of a mess I know guys.

 

The deductibility of the interest for the shares seems fine provided they are all income producing shares of course. The fact the share money runs through CDIA is normal and that is the Commsec process. It doesnt harm deductibility itself. Provided you dont blend money in there or taking money out of it its all good.

Its just what happens with the other $560K. That could become a concern later. A loan split so the loan has two portions - Shares $140K and $560K "Other" and link the offset to the $560K portion. OR if the $560K portion has redraw check and repay the $560K loan until its time to use it. Ideally two offsets - One on each loan.

 

Thanks Paul. This puts my mind at ease a little.

1. The 560k which is in the offset, should I just put it back in the loan account and then draw down as I purchase shares (periodic purchases of 10/20k over time)? It's all uncontaminated money at this point.

2. One other fly in the ointment, the CDIA account generates interest (albeit they will be ridiculously tiny amounts) and this interest will get paid into the CDIA account (I can't have it paid elsewhere, I have tried). Does this impact anything?

EDIT: Shares are just vanguard ETF's - they will be income producing and likely never sold so I'm comfortable with this part of the discussion

 

1. Maybe maybe not. IT would be more a concern if you used any for any other purpose.
2. That actually a good thing ..Interest on borrowed money is deductible to the extent used to produce assessable income....including interest.
3. Vanguard ETFs also need to be tracked for costbase adjustments (AMIT Increase / decrease) and unlike shares the income will need to be accrued for the June period as its paid July-August etc. The tax report issued will assist excepting if its a US ETF in which case each distribution will also have witholding issues and not have a tax report. Sharesight is a common tool many use The commsec reports suck and will be 100% useless for any tax purposes.

 

Cool,

On point 1 and the money sitting in the offset - sounds like you wouldn't touch it and just leave as is. my concern was it may be 5 - 10 years before some of this money which is sitting in the offset account would then be used for share purchases and the nexus of time would become an issue. I will have very clean records by keeping the process the same through out so I'm ok with this approach.

Good point on point 3. Yes commsec is hopeless. In previous years I've kept a file for all cost base adjustments (etf structures are annoying). Regarding the income, I just wait for the annual statement from vanguard before I perform my return and then enter on the tax return according to that, I've never accrued anything - I will look deeper into this

 

Accrual is just an accounting thing to bring into the tax period an amount received after the end of financial year that is tied to the former financial period. ie a trust or company investor. If its personally owned the tax statement will be the relevant data.

 

I would be more concerned than Paul. Best to be safe than sorry so I would pay money back into the loan and redraw it

 

Time doesnt change anything to sever the nexus to the borrowed money. BUT....I will agree that time often leads to silly mistakes and forgetfulness. It would be cleaner and less open to dispute if the loan were repaid and redrawn when needed to avoid this.

 

Thanks Terry & Paul,

So just to be clear, i take the 560k and put it back into the loan account, it will now sit there until i deploy the funds for share purchases. Final questions:

1. Does it now muddy the water a little given I'll have some purchases where the funds came from the offset account and some purchases where the funds came from the loan account?

2. When I do purchase shares, should I transfer the funds from the loan account into the offset account and then into the commsec account (for consistency with previous purchases) or should I just go straight from the loan to commsec?

Can't stress how grateful I am for this advice.

 

1. Yes
2. Ideally loan to use

 

Hi Terry,

Thank you so much for your answers @ this forum. I have read this forum however I am still confused with offset account.

1. What does it actually mean when you say you are "parking"?

So if I have $100k cash sitting on the offset account to lower the interest of my variable loan, fortnightly salary come into that account, everyday expense, bill payment, holiday also come out from that account--> Does this considered as parking? Which part is "parking"?

2. About Terry's answer to Nick's question above (quoted), Terry says that the interest is deductible if it relates to the purchase of income producing property. But I read another thread about Borat who signed up for PPOR loan, but then he bought a personal car and that interest is still fully deductible.

Tax Tip 19: Avoid Using Redraw on an Owner Occupied Loan

Sorry by reading this multiple times, one statement says that it is only deductible when the money taken out from offset is being used for income producing only. The other one allows the private use (buying car) to be deductible. So which one is correct?

3. For example Andy has got owner occupied PI loan of $300k at the beginning, but then he put his $200k cash into the loan that has redraw facility (not offset). Now he realised that he has made the mistake, then he contacted the bank to have offset account, and leaving the $200k cash in the loan.

Going forward any extra money (salary, gift etc) will be put in offset. When he decided change the property to investment and redraw money from the offset account to put on deposit for his next owner occupied property, will be be able to claim the interest as deduction?


Thanks a lot for the help