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