Tax Tip 1: Parking borrowed money in an offset account

It is now a mixed purpose loan.

 

I understand a lot of people use this strategy, but I personally don't like the uncertaintly of "may" and "probably". Those words don't match my risk profile.

Anyway, I have an existing loan that I am using to purchase an investment property. I spoke to the bank and they won't let me transfer funds from the loan account to my settlement agent for settlement. However, they do allow us to order a bank cheque for this purpose. I have chosen this route as I would much prefer to invest the funds directly from the loan account.

I would like to thanks @Terry_w once again for all his time and effort posting tax tips and legal tips. These form an invaluable resource for us all to benefit from.

 

Is there a difference in putting borrowed money into an offset or borrowed money into a redraw if the offset account will never have any private funds in it and only be used for investment purposes? Iv been told an offset account is advantageous to a redraw as a redraw will be closed if it's paid off completely but I can't understand why there's an advantage or disadvantage to the two
Eg loan 1 $100k / offset 1 $100k (really which is available equity )

I have a separate offset that private funds/ salary will go into

 

Yes there is a difference. I covered this in the opening post I think.

Offset
$100,000 borrowed and parked in offset on 1 June 2016.
$100,000 used as deposit for investment on 2 July 2017.

There is a 2 tax year time lag between borrowing and investing - does this weaken the nexus between borrowing and investing. Is the interest incurred directly related to the borrowing?

I don't know but the more time that passes the weaking the connection.

Redraw
As above but on 1 July 2017 the $100,000 is paid into the loan again and redrawn on 2 July. This means the borrowings occur on 2nd July, right at the point you are investing. A direct connection exists with less doubt to the path taken and what the borrowed funds were used for.

 

What if the situation was like this?

Refinance: Bank releases borrowed money $100K due to equity release and change of banks. 01/06/16

Offset
Offset A (salary, rent payments go into this). This is offsetting Loan A ($450K, IP)
Offset B , offsetting Loan B ($100K equity). Loan repayments for Loan B come from Offset A.
Bank releases $100K equity and places it into offset B.

On 02/07/17 the $100 K is used for a new IP deposit and funds are drawn from offset B.
Is there anything wrong with doing this?

Redraw?
Offset A (salary, rent payments go into this). This is offsetting Loan A ($450K, IP)
Loan B ($100K equity). Loan repayments for Loan B come from Offset A.
Bank releases $100K equity and places it into loan B
(However, if the bank places 100K into loan B it will pay it off straight away!)

 

confusing and messy.

See my posts above where I have covered these issues.

 

Bankwest setup my IO loan splits and offset accounts yesterday.

Apparently it is not possible to direct-debit expenses from the IO loans. I have therefore had dedicated offsets established and associated with each loan. Will periodically top-up the offsets ( perhaps using balance-warnings when they get low). Intended use of one of the loans is for costs associated with my next IP (deposit, stamp-duty, legals/purchasing expenses, minor reno, landlord insurance and will pay for these expenses via the offset).

Hopefully the above approach will work.

Will adopt a similar strategy for the second loan which at this stage is intended to be used for share purchases.

Incidentally - bankwest allow a number of separate offset accounts to be associated with a loan.

 

Yeah I don't get why so many people are so keen on borrowing to put into an offset.

Honestly just use a line of credit, or redraw, or some other 'cleaner' way - there's so many stories of people stuffing it up its ridiculous.

 

As pointed out above there are risks with using the offset account approach.

One bank stuff up with depositing funds and your deductibility is ruined. One personal stuff up too - I have seen some mistakenly deposit in the wrong account.

Even where there are no mistakes you are weakening the connection between borrowing and incurring interest.

So my advice is to avoid parking money.

 

What happens when the bank starts closing the redraw account?
For example if 80K is parked in a redraw account that leaves it in 80K credit and no interest paid.

 

If the account is closed you will need to reapply.

 

Isn't there a risk of the bank simply closing the redraw account if the loan is sitting there unused?

 

I dont think so. Not unless it is a Loc.

 

Because banks tell us that we can't transfer directly from the loan account. However, I have found this is not true.

I currently have a loan with ING Direct that I am using to purchase a property. I was told by ING that I can't transfer directly from the loan account to my settlment agent's trust account and that I would need to transfer funds from the loan account to an offset account and from there to my settlment agent's trust account. This is not true.

Option 1:
For amounts up to $20,000, I can transfer director from the loan account to my settlment agent's trust account.

Option 2:
For amounts over $20,000, I can write a letter to ING requesting a cheque be prepared to my settlment agent's trust account.

This will not be the case with all loan accounts but just saying if your bank tells you that you can't invest money that is in a loan account, this is not necessarily true.

 

Sorry @Terry_w but i really want to understand this even after the 8 pages

1. If i have $100k in savings and borrow $500k for investment (equity or LOC loan) then to maximise tax deductible, I do not put the $100k into the interest offset account (as urine in the coffee cup)- but rather into a TD maybe? Am I correct?

2. If i put the $100k into an offset account against the loan and later i took it out (assume the loan is still $500k) then I can not claim the full tax deductible on $500k loan? or only on deductible on $400k?

 

ttn

1. no

2. no


See
Tax Tip 82: Taking money from an offset account on an IP and Claiming Interest https://propertychat.com.au/communi...-account-on-an-ip-and-claiming-interest.6012/

 

Thanks Terry that only 1 tax tip to read than 6 pages of excellent Tax Tip (I am reading 1 by 1 btw)

So does not matter if only 1 offset account for savings + rent income vs 1 offset account for savings and 1 offset account for rent income?

 

It only matters if you have parked borrowed money in an offset.

 

I may miss something really obvious here, but why would one borrow money and park it in their home loan offset to begin with?

If someone borrows money by opening a new investment loan, the investment loan interest rate is most likely to be higher than the home loan anyway, so will pay more interest..

It'd better if the money is parked in the investment loan itself if not going to be used to invest right away so that you don't need to pay interest on it and redraw as necessary when it is ready to be invested.

Correct me if this is wrong.

 

Because of lender policies.

Many if not most lenders insist on paying the money out at settlement. Then many lender do not allow payment directly from the loan account. This is not the case for LOC products though but they come with a higher rate and are generally at call.