Tax Tip 10: Offset in the name of the lower income earner

Offset in the name of the lower income earner


Once you have paid off your main residence you will probably want an offset account on one of your investment properties. This will be useful to store cash from rents and wages and also to save up a buffer for emergencies.


Where you have used the strategy of buying properties in sole names, some in the name of Spouse A and some in Spouse B, you can move money around to save tax. You would want the cash in the name of the lower income earner as this spouse would generally be the one paying the least tax. Where there are several lenders involved (with that spouse) you would choose the lender with the highest rate.


Money in an offset means less interest is incurred which means more income from the property.


Keep in mind the legal consequences of ownership in different names too:

• asset protection
  
  
• estate planning on death
  
  
• effect on spousal loan strategies
  

Perhaps a private loan agreement, even at nil%, can assist in legal planning.


This is also another reason to consider purchasing in sole names.

 

I think this is a strategy being under utilised by many. I often see clients where the properties have been purchased in the higher income earners name for tax and the other spouse owns nothing so the cash has no place to be stored other than in the offset account of the higher income earner.

 

It may also be beneficial to NOT use an offset. Offsets arent always a great idea.

ie Husband is a high income earner and wife does not work. If they accumulate savings in a interest bearing ING account at 2.5% in the wife's name that would be tax free income and allow husbands neg gearing to be maximised. If an offset was used his interest deduction would be reduced

But if they had a non-deductible PPOR debt that would be better again and allow them to pay less interest on their home AND max the neg gearing

 

Example

Homer is on the top marginal tax rate and his wife Marg has a taxable income of $0. They each own 2 rental properties. They have just paid off their home and old man Simpson has died and left them with $200,000 cash.

Where should they put it?

The answer, from a tax perspective, would be in an offset account attached to Marg’s loans.

Loan A is at 5% pa and Loan B at 5.5% pa. Both have offset accounts.

In this situation if $200,000 is deposited in:

Loan A the savings would be $10,000 per year. Marg would pay no tax on this

Loan B, the savings would be $11,000 per year. Marg would pay no tax on this.

There would no extra tax to pay as Marg’s income is $0 before this, and after depositing her income would be either $10,000 or $11,000 both of which are under the tax free threshold.

Let’s say Homer had 2 loans with each at 6% pa. If the $200,000 was deposited into either of Homer’s offset accounts the interest savings would be

$12,000 per year.

But as Homer’s interest decreases by $12,000 his income increases by this amount and because he is on the 47% tax rate 47% or $5,640 would be lost in extra tax.



Thus after considering tax the funds would be better placed into the offset account on Loan B belonging to Marg.

 

Depending on their ages there also may be merits of investing the offset funds so that the non income producing spouse produces 100% tax free income rather than using a offset which reduces deductions for property owners.

There could also be merits of considering additional super contribution by the higher income earner each year through to retirement and allowing the lower income earner to hold the cash in super - For now obtaining refundable tax credits. And perhaps accessing tax free growth.

Many strategies are available. Anyone who inherits $200K should consider licensed financial advice before running off and accessing a offset. Brokers shouldn't be recommending a offset to address such a case as the advice can be financial advice not credit advice.

 

An offset account is not a financial product, I believe, but a credit product. Happy to be proved wrong though.

 

ASIC consider it can be a credit product in its simplest form ie establishment of a new offset and loan facility. A decision to place cash into a offset is financial advice as all alternatives are also available. An AFSL is required.

03-388 ASIC grants relief in relation to mortgage offset accounts | ASIC - Australian Securities and Investments Commission

The above class order provides a limited exception for mortgage brokers when establishing a loan and offset. It doesnt cover a matter of placing $X into a offset

 

That press release is 15 years old now, prior to the NCCP Act too.

 

Yep but the financial product view hasnt changed. More recent instrument which excludes AFSLs from credit laws ASIC Corporations (Mortgage Offset Accounts) Instrument 2017/795 which covers s911A(1) Corporations Act 2001.. It broadens the issue of disposal and acquisition of a financial product v's a new facility which does not. One deals with the balance, the other with the account.

Most people also dont realise that a statement such as "You should open an account with ING" is financial advice.

We encountered this as we have a AFSL and have added mortgage services. We need to ensure AFSL redress if there is a cash balance in offset v's a new facility.

Its not unlike the SMSF loan issue for accountants. They must hold a AFSL to discuss SMSF loans since it relates to acquisition of a financial product despite it being credit product in appearance. The financial product is the SMSF acquisition of the property using the loan. The credit product is the loan.