Tax Tip 1: Parking borrowed money in an offset account

I don't know what that means, but you will be creating problems for yourself.

 

Terry, thanks for the post and the knowledge sharing! After reading it I have questions in relation to interest deductions for my own situation. Hope to get your advice.

I have a PPOR loan (Loan A) which is fully offset (Offset A).

I used the equity in my PPOR and borrow more from the bank (Loan B, say for example 200K) and $200K borrowed money was transferred into the offset account for this equity release loan (Offset B). I used $150K of it to pay the deposit for an IP (transferred out from Offset B).

My salary and rent etc all transfer into the Offset B (because Loan A has been fully offset). From what you said I believe I have mixed up the purpose. How can I fix this? Can this still be fixed up? If I don't fix it, am I losing all deductions or part of the deductions?

If I understand correctly, what I should have done is I should have transferred the $250K from Offset B to Loan B once the loan was set up, and redrew $150K from Loan B to pay the deposit. Then what about my salary and rent, shall they be paid into Loan B or Offset B so that I don't mixed up the purpose of the Loan B?

Many thanks!

 

And Loan B is P&I by the way.

 

You will have to become a client to get advice.

Looks like you have a mixed loan now and should read my other post on unmixing a mixed loan

 

Maybe I shouldn't have used the word 'advice', making this sounds too formal. But would you please let me know what's the cost of becoming your client and getting your advice on loan structuring please?

Re my question about what I should have done, this is actually the part I don't fully understand from reading your post. Shall I have my salary and rent income paid into Loan B account or Offset B account to avoid mixing up? What about when I need cash for private purpose in the future, how can I make sure the withdraw doesn't mix up the purpose of the loan?

 

I don't charge anything for clients of Loan Structuring Pty Ltd.

 

probably not as he didn't save you

If you borrowed $92,000 and then put this into an offset account containing other funds it would be a mixed use loan.
You could fix this buy moving the offset money back into the loan.
But if you moved the offset money into another offset account it will still be mixed and you have compounded the problem.

This is why broker's shouldn't give tax advice.

 

Hi Terry,

CBA released equity funds and this is created as loan number 2 with a separate offset account. When I asked if I can draw funds directly from the loan to pay deposit, conveyancing, building and pest or anything investment related, they told me to be careful bank may take the money back if I put money back into loan and than withdraw.

My plan to use offset is only for the initial purchase costs . I do not plan to park any incoming funds in that account.

Is that ok.

 

Have a read of this thread as this is what it is about.

 

Hi Terry,

Re: the following -

If you have an investment loan and borrowed money was put into the attached offset account, and these offset funds were used to purchase an investment property, then is it ok for the interest to be debited from this offset account?

Is it ok to put money back into this offset (from elsewhere) to cover the money taken out for interest? Does it matter how soon you put the money back in to do this, eg months later?

Would any of this ‘contaminate’ the offset account or is this perfectly fine and not affect the tax deductability of interest incurred?

Thanks in advance!

 

It doesnt matter where iterest is charged to, paid from or repaid. Interest is INCURRED, and isnt deductible when paid.

Paying loans from borrowed funds may mean the loan is capitalising (even if the debt doesnt capitalise) or being used for non-deductible purposes. The sole outgoing you should NOT pay using borrowed funds is loan repayments or interest unless specific short term circumstaces exist. However, if the interest was charged and paid in the same account I suspect you have a blended loan issue which will gradually erode the deductible %

I would suggest your tax adviser be provided opportunity to review and advise.

 

It would contaminate the loan.

 

Hi,

1, Whats the difference between using borrowed money from offset account to invest vs redrawing when investing?
2, lets say i have equity release of 100k in 9ffset ac and i use only 80k and 20k for personal expenses such as car, will interest on 20k will be deductible? What should i do if i want to use that leftover money?

Thanks in advance @Terry_w @Paul@PAS

 

If you do it right the ATO will consider the Offset account as if it is a large LOC.
So little difference except perhaps it is easier for it to be polluted.
Checked out episode 8 of my podcast
Podcast – Structuring

 

Hi Terry,

I've had a problem which bothers me so much.

I have a 300k PPR home loan and my PPR is worth 800k.

I have cashout 200k and plan to invest in shares monthly.

So I set up 2 fresh offset accounts and they were both empty and there was no money in there (so no mixing issue at all).

These 2 accounts are named:
PPR offset account
Invest offset account

I asked the bank to put all 200k cashout in my invest offset account, so I would be ready to invest. But the bank somehow put all 200k cashout in my PPR offset account on the loan settlement day, so I needed to transfer all 200k cashout from PPR offset account to Invest offset account right away. Once again no mixing issue at all.

My questions is whether this transaction (from PPR offset to Invest offset) will affect my tax deductibility.

It would be highly appreciated if you could look at this case for me please.

Thanks in advance.
Kai

 

Isnt is easier to rename the two offset accounts ?? The only issue is each account has the funds for the other purpose in it. It doesn not matter what an account name or nickname is. But rename to avoid confusion.

 

Hi Paul,

Thanks for your reply.
I forgot to mention both offset accounts had been linked the loan accounts since I set them up.

Since the transaction has been done already, is there any consequence?

Thanks.
Kai

 

Has any mixing occurred?

 

Hi Terry.

No mixing occurred. Both accounts were empty. I transfered the 200k cashout immediately from PPR offset to Invest offset after the bank settled the loan.

 

in that case what is your concern?