Tax Tip 1: Parking borrowed money in an offset account

@Terry_w
I have recently split my PPRO loan into 2: One for non-deductible PPOR purpose and one for investment purpose. Both portions have their own offset accounts. So I have a bit of equity in my offset against IP part of the split, it's clean at the moment with no contamination.

Before setting all these up, I had to pay deposit for an IP. So I paid $10K from my savings. Now that the split is already setup, can I pay that $10K back into my savings, so that amount is tax-deducted on the interest occurred on IP part of the split?

Thanks in advance!

 

You can't reimburse yourself. Tax Tip 5: Reimbursing yourself - Impossible

 

Hi Terry,

I am in a dilemma again.

Current situation:
Loan: 335000
Offset amount: 145000
P&I
Security PPOR

After The split
Split1
Loan: 235000
Offset amount: 145000
P&I
Security PPOR
Split2
Loan: 100000
Offset amount: 0
I Only
Security PPOR

confusion i am having is , should I

1. Transfer 99999 from Split1 offset account to split 2 offset account and tranfer to IP deposit and expenses

2. Transfer 99999 from Split1 offset account to split 2 loan account and tranfer to IP deposit and expenses

Also having a -$1 balance in the split 2 any issue? This is to keep the loan alive.

 

I don't understand.

Transferring cash from one offset to another doesn't change much.

You should borrow to invest, don't borrow money into offset accounts and don't mix loans.

 

Sorry Terry, May be i am getting this all wrong.

I have already made the mistake of parking the equity in my offset account.

Loan: -335000
Offset amount: +145000
P&I
Security PPOR

To fix it i was asking bank to split the loan in two .

When they split i was told

Split1
Loan: -235000
Offset amount: +145000
P&I
Security PPOR

Split2
Loan: -100000 (redrawable amount 0)
Offset amount: 0
I Only
Security PPOR

Second split has balance of -100K. I cant really use it until I pay this off. This is why i was planing to pay this off by paying money from my split 1 offset account. If i pay full amount bank might close the loan being paid off fully.

Does this make sense? am i heading on right track?

 

Ok, so you borrowed $100k and placed it into an offset account?

You then split the loan into $100k and other portion.

You can then repay the $100k loan (taking care this doesn't close the loan).

Once this is repaid when you reborrow the money from that loan the interest will be deductible as long as the usual requirements are met (not further detours etc).

 

does it have to be 100K? can it be 99999?

 

Yes could be but then only 99.999% of the interest would be deductible. = not enough of mixing to worry about.

 

Thanks Terry

 

hey everyone, been reading this helpful thread, thanks Terry!
Was wondering if my setup is ok for tax purposes?

Purchasing IP1 (300k), with PPOR paid off.

Loan 1 (bank A):
- 300k
- IO
- Secured against PPOR
- Offset account

Loan 2 (bank B):
- 100k
- IO
- Secured against IP1
- Offset account #1
- Offset account #2

I am planning to put the surplus (BORROWED) 100k, into offset account #1 at bank B (as the interest rate is higher with bank B, compared to bank A).

Questions:
1) To avoid contamination, is it ok to deposit my wages, rent and other private savings into offset account #2 at bank B?
2) Does parking the borrowed 100k into offset account #1 at bank B avoid contamination?
3) In the future when I want to purchase IP2, can I just use the combined funds from offset accounts #1 and #2 at bank B, as long as it is entirely for investment purposes (purchasing IP2)?
4) Any better way to set this up?

Sorry for long winded post

 

Peter_h

I suggest you do not park borrowed money into an offset.

1. as long as this account contains no borrowed money it should be ok.

2. no

3. yes, but consider the tax consequences

4. yes. use a LOC.

 

thanks Terry.

With question 2 ("Does parking the borrowed 100k into offset account #1 at bank B avoid contamination?"), is it technically possible to avoid contamination this way? (with great discipline to never put non-borrowed money into this account)

Or is this setup ALREADY inherently contaminated?

 

If the account contained no non borrowed money it wouldn't be contaminated. But you are borrowing money and parking it which is the problem, especially as there will be different interest rates. Seek specific advice

 

Can you please advise? I am still confused...

Loan 1 (Bank A)
- 200K
- Secured against IP1

Loan 2 (Bank A)
- 100K
- Offset amount: 100K
- Secured against IP1

I refinanced IP1 and the bank placed the money in the offset for Loan 2.

1) If I use the money in the Offset to pay for IP expenses, is the interest tax deductible?

2) If I use the money in the Offset as deposit for IP2, is the interest tax deductible?

3) Will putting the rent from IP1 & IP2 into Offset contaminate the account?

 

1. Possibly in part

2. Possibly in part

3. Yes.

 

Good one. Use a redraw/LOC on refinanced money, and keep that account used for investment purposes only. Safest.

 

Hi Terry,

My situation appears similar to scenario described in your Tax Tip 1 and looks like so far I have managed to keep urine and drink separate.

I have a PPOR and and offset attached to it. I recently bought an IP and planning to buy more in near future.

Initially I had this:
ppor_loan = 378k
ppor_offset = 200k (salary goes here and all personal expenses from here.)
---------------------------

I revalued my ppor and put equity into another loan account with a new offset attached to it. let's call it investment_loan(I will make sure I won't use it for non-investment purpose.)

ppor_loan = 378k
ppor_offset = 200k
investment_loan = 118k
investment_offset = 118k
-----------------------------

Then I bought an IP and paid initial deposit(105k) from investment_offset. New accounts look like below. All loans are IO.


ppor_loan = 378k
ppor_offset = 200k (salary & rent goes here and all personal expenses from here.)

investment_loan = 118k
investment_offset = 13k (future IPs expenses to be done from here)
ip_loan = 512k

Q1: Can I make interest payment for investment_loan & ip_loan from ppor_offset (instead of investment_offset) and still make both interests paid fully tax deductible ? Can interest debited from ppor_offset for investment loans cause contamination?

I don't want bank to deduct any money from investment_offset because of following reason:
As some equity has build up in IP1 I am planning to get bank valuation done and have bank increase investment_loan by X and investment_offset increase by X.
So, when I buy another IP2 in future I can pay initial deposit+expenses from investment_offset and still have interest paid on investment_loan fully tax deductible.

Q2. Is my strategy correct? In future I will pay all IP 1 & IP2 expenses from investment_offset while all incomes (salary, rents from ip1 & ip2) will go in ppor_offset.

Thanks for your kind help. You are the king of this forum

 

Sounds messy. You are borrowing and parking in an offset account. If you borrow more from the IP and put in the offset account you will be making it more messy.

I would suggest you need specific tax advice

 

I'm a little confused after having my loan refinanced so want to ensure it is setup correctly and I'm on the right path before purchasing IP.

Loan 1
PPOR $250,000
IO

Loan 2
Equity $200,000
IO

Offset
$200,000 (linked to PPOR)
The bank has parked the equity into this account

Can I simply transfer 99.5% back into the Loan 2 so it becomes deductible?

What if additional money has already been deposited into the offset, does it need to be resplit?

 

Yes because depositing into the loan is a repayment and when you take the money out again it will be new borrowings.

Doesn't change if there was other money deposited in the offset account.