Tax Tip 1: Parking borrowed money in an offset account

Hi Terry.

My concern is whether that transaction would cause interest/tax deduction problem for my 200k loan for investing shares.

Is it okay for borrowed money to be transferred between accounts?

Coz your original post metion 2004 Mrs Domjan put her borrowed in another account which made her not able to claim tax deduction.

 

That is something you should seek your own tax advice on.

 

Yes tax advice specific to issues is always wise... For example buying shares and ETFs that dont pay income means that portion of the interest isnt deductible. eg 10% of the borrowed funds are used to buy Tesla share sthrough self wealth with the other 90% for income producing shares. Another example . You buy CBA shares and sell them then buy Tesla shares. From that date, part of the loan is non-deductible

Other main issue. The borrowing was in your name. The shares are in your wife's name. No deduction for either of you.

 

A debt recycling tip:
If borrowing to buy shares and some produce income and others don't it is a good idea to split the loan and segregate the interest incurred for these as the interest on the non-dividend paying shares could be used to reduce CGT when the shares are sold.

 

Hi Terry,
Going back to your original post...

I do not own a PPOR at this stage as we are renting.
I am in the process of securing my first IP and the hope is to obtain several more over the next few years as well as possibly my own PPOR.
IP loans will be IO investment loans with offset accounts to each loan. Starting with the initial property, the offset account will only have the rental income being deposited and loan payments withdrawn however in order to reduce the overall interest i also wish to deposit our usual "savings" into that account. These "savings" will later be used towards a deposit on another property or whatever else we might need however when the time comes, i would withdraw the set sum into a different account rather then use them directly from the offset account as technically they do not "belong" to the IP - does this all sound okay?

I assume or at least i hope that when the time comes to purchase my second IP, i can refinance the first loan and lock away the equity (if there is any from capital growth alone). Is this equity best to be locked away in a totally new account or it can be put into the first offset account to further reduce the interest and then withdrawn at a later stage to secure the 2nd property? Once secured, there would be a new offset account relating to the 2nd property.

With regards to the "savings" I was depositing initially - where are they best to go?

I am then a little lost as to what to do or how to structure the PPOR loan later down the track?

Thanks so much.

 

Tax Tip 112: Segregating Cash in different accounts - No Need Tax Tip 112: Segregating Cash in different accounts - No Need

 

The new loan may be deductible v the second property IF the funds are then directly used to buy IP2. There is technically no such thing as "locking away equity". Equity is the difference between market value and loans. It will rise and can fall. If it rises many lenders may limit new loans (equity out) to 80% and also allow a minimum out, maybe. What you borrow doesnt lock away equity. Equity remains fluid. If values fall after access to equity you could go negative equity for example. And increase in loans increases your borrowings so equity reduces. Typically the buyer of IP2 will use equity out of IP1 to pay deposit and costs and still borrow 80% on IP2.

 

Thanks for that. From that thread it would make sense if we had a PPOR loan but we do not....unless i'm missing something. I'm keen to have a consultation with your company to ensure i set things up the correct way. Should i go direct though your website?

 

Thanks for that. I was under the impression you can lock it away so for example value is 800k, loan is 500k, equity is 300k but usable equity is 160k (if i have done my maths right)...so i thought you can refinance and move that 160k into another account essentially locking it or am i thinking that it is actually called equity out?

 

So, I’ve read the whole 17 pages of this thread and, if I understand correctly, it can be summarised as: the interest paid on money borrowed, parked in an offset account, and then used for income producing purposes probably might be claimable, but this practice is not recommended.

First of all, as it is a relatively dated post, I was wondering if anything had changed in regards to this advice because of something happened since the start of the posts (eg private rulings, outcome of audits, etc), either in one direction or the other?

Specifically, In my case, I have borrowed 50k in a new split, repaid it in full minus $1 to keep it open, then redrawn the full amount and parked it in a offset account associated with this split, which has never had any money in it. I plan to use this account to pay all expenses associated with an IP (agency & PM fees, maintenance, etc), and I intend not to ever deposit any money in it (the rental agent has the details of a different account to pay in rent). The money will therefore be used to pay for the IP expenses for a number of years, will this weaken the link between the loan and its purpose, or can I still claim the interest in full?

Repaying the loan again and then redrawing it only when necessary, albeit possible, is very impractical, as I don’t think I can set up recurring payments from a loan, and also, being the loan P&I (my bank doesn’t allow redrawing from I only loans), there is the risk that the split might be closed if the repayments exceed the expenses drawn out at any point in time (ie more money goes in then it goes out).

 

That is probably a good summary.

I have had a few private rulings for clients since I started this thread and it seems, in some situations, that the ATO sees a loan and offset combo as being similar to a LOC. You and borrow park in an empty offset and immediately use that money and it will be considered to be borrowed money as long as it is not mixed. This is also implied in the Domjan case.

But what you are proposing to do will be more complex as it will span several years probably.

The only way to find the answer is to get a private ruling. But first you should get the tax advice and consider whether you should apply for a ruling or not.

 

Will this work then?
Pay off the loan in full again, then withdraw some money (say $1000) and deposit it in the empty associated offset account, and use it to pay for all expenses until the account is empty again (let’s say a month or two). Then withdraw another 1k until entirely used, and so on. If the money borrowed is used to pay for deductible expenses within 1 or 2 months rather than many years, will the nexus stand in this case?

 

Isn't that the same thing?

 

not quite, the first method entails re-borrowing the full amount (50k) all in one go and parking it in the offset, which would take years to be spent in expenses, while with the second method I would borrow a small amount every month (let’s say $500-$1000) and spend it in a month or two.
From your previous post, the fact that the money would be used for several years made the situation more complex, so I’m wondering if reducing considerably the amount of time between borrowing and using the money makes it easiest to demonstrate its use.

 

Isnt this a issue that highlights why a tax adviser assists? You cant rely on forum post to avoid error. There is protection only by seeking tax advice. I

 

that would be safer than doing it in one hit I would think, but you would need a private binding ruling to know for sure.

 

One of the greatest risks to using borrowed money in a slow ongoing process from a offset is that the ATO will expect you will demonstrate EVERY SINGLE new use of the total borrowing has a deductible purpose (acquire, improve, maintain, onwership costs). During that extended time period if any new funds are added to the offset account it also affects the deductible % to the point where its just too confusing so the ATO says - We are cancelling interest deductions for that loan.

 

Some related tax tips
Tax Tip 423: Borrow and Park in Offset and Fees Before Using the Money Tax Tip 423: Borrow and Park in Offset and Fees Before Using the Money

Tax Tip 428: Borrowing Costs and Borrowing and Parking the Borrowed Money Tax Tip 428: Borrowing Costs and Borrowing and Parking the Borrowed Money

 

Question that sort falls under this topic and under mixed loans..

John transfers 50 from PPOR loan into empty PPOR offset. A day later, he transfers another 60,000 from loan into offset (intended for investment purpose) which brings offset balance to 60,050.

Few days later, he withdraws 50 via cheque from offset to savings account for non-income producing purpose.
3 months later, right investment opportunity comes up and he transfers 50,000 for income producing purpose.

Is interest on $50,000 tax deductible? No other funds were transferred in or out of offset account during that time.

 

Not in full