Tax Tip 1: Parking borrowed money in an offset account

I absolutely understand this, which is quite stressful for me because existing paid accountant has been saying "don't worry, as long as money in the offset is used for investment, you can sleep easy". I do want to make sure that everything is correct and I presume that everyone else who is reading and posting here does too. Then the onus is on the taxpayer to go and question the advice of a professional which then builds distrust and destroys the relationship. How will I know if another accountant is slightly wrong in another area then in an area I personally have not investigated? That means I may as well go and study a whole accounting degree/course just so I know that an accountant is applying tax law correctly

Man these posts make me want to cry, it seems like all the risk with the taxpayer and most people do not have accounting degrees and are relying on the advice of paid professionals yet the risk is bourne by them. Just seems contradictory that the tax office is expecting this kind of expertise from average joe.

I just have one last question on rescuing the tax deductibility of a loan attached to an offset account then.

If I have a loan with an offset account and the bank gives me a loan increase and puts the funds in the offset account and then I take that money, half to buy a car (private expense), and the other half to buy an investment property, I've obviously contaminated that loan increase and the interest on that is not claimable anymore.

1) If I pay that loan increase off fully to "wash the loan" and then do a direct EFT to purchase another property (and not use it for private expenses anymore), will the interest on that loan increase be claimable again? Again some accountants say it is and some not, from your post Terry it seems your answer would be a "NO"?

2) If I take that contaminated loan increase and instead convert it to a LOC and then pay that off, can I start using that LOC again (purely for investment) and have the interest be tax deductible again?

 

I guess it is like taking medicine. You go to the doctor for advice on what to take, but the risk is yours if he or she is wrong on the medicine they prescribe. You can sue them if they get it wrong though.

Interest on borrowings to invest is generally deductible.
so the interest will be deductible if you set it up right
1. Yes
2. Yes

but both depend on how you start off.
$
example
$90,000 loan increased to $100k = mixed purpose loan and very messy

or $90k loan and loan increased by $10k under a separate split = clean and easy to fix. Just pay off the $10k and reborrow it. No mixed purpose and redrawing -- new borrowings which means interest will be deductible depending on the use.

 

In this scenario, simply just splitting it to 90k and 10k after the fact and paying both off or conversion to LOC is not going to work right? Is that loan basically contaminated forever or forever apportioned?

 

ATO will allow a mixed loan to be unmixed in certain situations. Best to split from the beginning though.

 

Thanks @Terry_w , you've been most helpful!

 

I know @Terry_w advises against putting borrowed money into a savings account and investing it from there. Given that it is a bad idea and could result in interest deductions not being allowed, I have a question. If I deposit borrowed funds into an empty savings account and invest directly from there, what happens when the bank starts depositing interest into the account? Say I start with $100k. At the end of the first month, the bank deposits $2,750 into the account. There is now $102,750 in the account. Would that be considered a mix of borrowed and non-borrowed funds? i.e. the funds are now contaminated.

P.S. this could be another reason why it is a bad idea to deposit borrowed funds into a savings account!

 

Do you mean the bank would debit the interest against the loan account?

Assuming the $100k is not contaiminated then the interest would be deductible.

If the interest is not paid it would be interest on interest or capitalising - see thread on capitalising of interest

 

That's not what I was thinking of. Borrow $100k. Park it in an empty high interest savings account and invest the borrowed funds from there (bad structure). The bank pays interest on the money in the savings account monthly into the savings account. Now I put it like that, it's a really bad idea.

 

Most unusal. But I guess you would be correct. The bank would be depositing or crediting interest which would cause the offset account to contain both borrowed and non borrowed money which in turn creates a mess of a mixed purpose loan.

 

Thanks @Terry_w. As soon as I typed it in, I realised it was a bad idea. I spoke to my broker today and he is setting up all the loans so that borrowed money is invested directly from loan accounts and not through in intermediary account such as an offset account.

 

Anyone know what time CBA take your daily balance for offsetting? Also is it tied to day light or standard time? Thanks

 

It is not timed like that. They would take the lowest daily balance probably.

 

Hi Terry,

Just wondering how to redraw the fund, could you please help to clarify?

If one of the loan account doesn't have enough fund, would that be fine to redraw fund from multiple loan accounts to a zero balance transaction/saving account(there have some transactions before, but currently balance is zero) , will this contaminate the loan? or better to have multiple bank cheques?

for example, loan 1: 50K loan 2: 50K, both are fully paid. and 20K in offset

1. if I need 75K to invest an IP1, can I redraw 50K from loan 1 and redraw 25K from loan 2, and put them into a zero balance transaction account, then draw a bank cheque.

in the future, I will need to re-merge the loan to different splits,
loan 1: 75K -- as I used it for IP1
loan 2: 25K -- will keep fully paid, and use when I need to invest somewhere else

2. if 110K is required for investment, can I redraw 50K from loan 1 and 50K from loan 2 and withdraw 10K from offset, then put all those 110K into a zero balance transaction account, then draw a bank cheque.

3. how to pay the fees for bank cheque and redraw, from offset or loan account? will this cause any deduction issue.

Thanks,
Tony

 

Tony - not sure I understand what you are proposing, but I suggest you avoid borrow and parking money into an offset account

see
Tax Tip 6: Using Redraw to invest
https://propertychat.com.au/community/threads/tax-tip-6-using-redraw-to-invest.1837/

 

Thanks Terry. The scenario I was trying to propose is

1. when there is no enough fund in one loan account, can I use a transaction account(0 balance) to collect all the fund, then draw one bank cheque for investment, or better to draw few bank cheques from each account.

2. Once I redraw fund from multiple splits, shall I reorganise the splits for the purpose of investment.

For the example above, 2 loans of 50k before investment, should change the splits to 1 loan of 75k for IP1 and 1loan of 25k for IP2, or Change the splits before using the fund.

3. And one more question, when settling an new property (bought at 500k). Based on market value(600k), I can borrow some extra fund(around 15.5k), shall I put the fund in the main loan(will have a loan of 415.5k), or create a another split for it.
Then I will have two loans of 400k and 15.5k


Thanks,
Tony

 

You should draw cheques straight from the loan without detouring into offset accounts etc. No tax difference if one or two cheques.

If your loans will be mixed after drawing then it will be better to split first.

If you borrow extra then you would want to segregate the extra portion depending on what it will be used for. $15k aint much so you might borrow it and pay it back into the loan and then reborrow it down the track for the expenses associated with that property. Same purpose so no mixing.

 

Thanks a lot Terry.

 

Just went to bank today, I was told it's not possible to draw a bank cheque from loan account, have to transfer to a transaction or saving account first. I am thinking to open a new saving account to do this. Is it ok? Can this saving account be reused next time? Or better to have a new saving/ transaction account every time when I need to do an redraw?

Thanks,
Tony

 

This sort of thing is annoying isn't it! Which bank was it?

If you have no other choice then create a new savings account and make sure it has no other funds in it when you borrow to place into this account. Once the cheque has been drawn then you can close the account or use it for anything else.

 

Thanks so much Terry. It was BW. I will go with saving account option, and close it once done.