Tax Tip 1: Parking borrowed money in an offset account

The old 2015 Borat example does not sound correct unless the car was used for deductible purposes and there is a logbook. Interest is deductible based on the use of the borrowed money.

In 3 Andy likely will create a complete mess and be unable to trace the original $200K in the offset with other savings in the offset especially if money goes in and out. (Make a chocolate milkshake. Now remove the chocolate syrup)

He would be better off repaying the loan and redrawing it at a later date when the use of the borrowing is more defined and certain. Ideally at that time pay the purchase deposit etc directly from the loan and not blended with the other savings in the offset.

 

First preference is always to move from the loan to the actual use of the borrowed money and if that means you need a bank cheque or a branch to assist then..do it. IF the offset has $0 in it then it doesnt matter if it hits the offset on the way through. But if other $$ is in the offset (or a savings account) it will affect full deductibility as you cant specifically identify the amounts OUT to commsec as being the specific sum that went it. Its blended.

eg Loan $300K and you wish to use all this for a share portfolio. You have a offset with $5,000 and the $300K hits the offset and then is paid to Commsec.

300/305 = 98.36% is deductible.

If there was $0 in the offset the interest would be 100% deductible​

 

1. depositing money that was borrowed

2. Borat borrowed to buy a main residence and later rented that main residence out. If he used redraw to buy a car, that main residence loan would be a mixed loan and only part of the interest could be deductible.
If Borat just took cash from the offset account to buy the car the whole loan would relate to the main residence purchase still so when it is rented the interest on the whole loan would be deductible (assuming redraw never used)

3. Andy has paid down a loan. If Andy redraws he is borrowing money again. If he leaves the $200,000 in the loan, no problem (other than his intial problem = he should have used an offset account in the beginning).
He should be able to claim the interest on the full original loan as long as no redraws and as long as it related to the purchase of the property. He can claim after the main residence is available for rent.

 

If you bought IP1 in 2012 for 300k and in 4 years it has went up in value to 400k. You refinance and extract the equity of 100k and park this in the offset of IP1 for 2 months and then buy IP2 using the equity, interest is deductible on both these IP.

Now 3 years later, you sell IP2 and park the money in IP1's offset while looking to buy a PPOR.

In 6 months you buy PPOR using the money in offset of IP1. Is the 300k on IP1 still tax deductible?

 

You haven't been following my writings. What has the borrowed money been used for determines deductibility

 

So would that mean the whole 300k is not deductible, or just the 100k that was refinanced?

 

What was the $300k used for? Is it a mixed loan?

 

IP1 was bought in 2012 for 300k with 20% deposit. 240k loan. Property value of IP1 was 440k in 2016 it was refinanced an extracted 112k. Current loan for IP1 is 352k.

112k was then used to buy IP2 in 2016 for 420k. IP2 sold in 2019 for 550k.

IP2 proceedings will be used to buy PPOR.

 

This doesn't answer my question in full. It seems it is a mixed purpose loan with $240k used to acquire that property.

You should get specific tax advice as sounds like messy and with issues

 

Thanks Terry, was asking on behalf of work colleague. Will advise her to speak to her accountant.

 

Hi Terry,

Thanks for the reply. So from Borat example,

Hi Terry,

Thanks.

-Regarding Borat example, I am still a bit confused, so what are you saying on point 2 is when Borat is still having it as his main residence, then buying the car with his money on his offset, then when renting the property out he can still claim the whole interest expense on the whole loan? So does it mean as long as it is an offset account, Borat can buy anything that is not income producing, using the offset account for everyday expense and still able to claim the interest?

So reading what you have quoted at the start of this thread:
"In relation to investing, under s8-1 ITAA97 an expense is deductible if it is incurred in gaining or producing assessable income. Interest is generally deductible under this section. But problems arise where the incurring is not directly connected with the investing."

Somehow the two statements do not click....

-"He should be able to claim the interest on the full original loan as long as no redraws and as long as it related to the purchase of the property. He can claim after the main residence is available for rent." ---

So Andy is leaving his $200k in the loan
He is adding offset facility on his loan
He starts saving money into that offset account
Andy wants to change the property to investment property, also using some money that is sitting on the loan and/or offset to buy his next owner occupied property
Which part of the loan can he deduct the interest from in the future?

Thanks

 

Andy takes four years to determine his deductible use? That makes it harder to determine and the long delay is unlikely to yield any yes no answers. I would suggest personal advice...... I know what Terry referred to but you can't possibly leap 4 years later and now ask to refill the gaps.

My suggestion is 0% without personal tax advice

 

I have another tip on using money in an offset accounts and investing. Maybe have a read of that one and come back.

Not sure what you are confused about
If a person borrows to invest in income producing assets, the interest word generally be deductible.

If some uses cash of an offset account to invest this is just using cash and doesn't effect the loan it is offsetting other than the reduced interest.

If someone borrows and deposits into an offset that is a different story

 

Hi Terry,

Just wanted to ask a question if you won't mind please,

I have an IP which i recently re-financed. Before refinance the loan balance was $300k

After refinance:

Loan 1: $300k
Loan 2: $30k

But as the refinance was done more than a month ago, the current loan balances are bit less due to P&I repayment for last month.

Both loans have an offset account and both are P&I repayments.

Now the interest on loan 1 is deductible but on loan 2 its non-deductible.

What is the best way to use the surplus $30k to buy shares and be able to make the interest deductible?

 

@Terry_w

 

Best to get some tax advice for your specific situation. Prob split the loan and borrow to buy income producing shares making sure there are no detours with the borrowed money.

 

If you have an existing account where there have been multiple transactions already and u want to use it to deposit borrowed money, does this account just have to be a zero balance just before you redraw money from a loan and put it in this account?

Or

Do you need a brand new empty account in which there has been no transactions till date?

 

If there is no money in the account there can be no mixing of borrowed funds with cash. So you would have an argument that you could trace the money in the account to the money borrowed.

 

I had come across an unusual situation recently where the client had borrowed money and parked it in an offset account. It was IO and unused for a while so no interest payable. They then bought a car for $50,000 and used the offset money. Then a bit later they repaid $50,000 into the offset using cash.

Now they want to use the cash to invest. Is it a mixed loan?

 

The interest accrued during that period won't be deductible. That's all I can safely answer.