Tax Tip 346: No Need to Get Rent or Dividends Paid into a New Account

Discussion in 'Accounting & Tax' started by Terry_w, 18th Mar, 2021.

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  1. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Some are overly worried about mixing things up and they want to segregate rent and/or dividends by getting them paid into a separate account to their cash and savings. They say they don’t want to create a mixed loan.

    But this won’t happen because mixed loans might be a problem but income from an investment is not borrowed money. It is income. There is no issue with mixing incomes.

    Generally all rents, dividends, inheritances, salary, savings, etc received by a person can go into the same offset account and it would generally be advisable that this be the offset account attached to non-deductible debt.

    If a person did set up a second offset account to just receive and segregate their rental income it would actually cost them money by losing out on interest savings on non-deductible debt.


    Example

    Homer has a main residence loan of $400,000 with $100,000 in the offset.

    He goes out and buys an investment property which he borrows $500,000 for and some shares which he pays cash for.

    Homer sets up an offset account on the investment loan and gets the rent paid here. He gets the dividends paid into another account.

    When asked ‘why?’ he talks about wanting to avoid mixing things.


    This is not needed and won’t cause any mixed loans. Homer is also losing money by offsetting an investment loan on which the interest is tax deductible. If he saves $100 interest on this loan, his taxable income jumps by $100 and he pays more tax. He also is missing out on offset savings by using the other account for the dividends which doesn’t offset anything – he is wasting interest savings.

    What Homer should have done is have everything paid into the offset account attached to his non-deductible debt. Repayments for his investment loan can come from this account without creating any mixed loan issues.


    The main thing to be aware of is if you have borrowed and parked in an offset account you will be causing a mixed loan if you put anything else in that offset account.
     
  2. Brookesy70

    Brookesy70 New Member

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    Hi Terry,
    This is all brand new to me and I want to get it right from the start as I look to get my first IP. I have a PPOR that I will be using to extract some equity to fund the IP. I'm not sure exactly what product yet for the equity and would appreciate your advice on this.

    Once I have the equity loan established and then a mortgage for the IP, will I be best to have all rental income go into my offset account against my PPOR and also pay any IP mortgage payments out of the same offset account?

    What would you advise is the best way to pay for costs such as rates, etc.?
     
  3. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    I won't give you advice, but the post above covers this doesn't it?
     
  4. Brookesy70

    Brookesy70 New Member

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    Hi Terry,
    In terms of the offset account for my PPOR, does it matter what goes in and out of that account e.g. mortgage payments for the PPOR, bills related to living expenses, etc.?

    Also, for expenses related to the IP (rates, etc.), would it be best to have a small LOC that is funded by PPOR equity to cover these expenses?
     
  5. JetstreamVic

    JetstreamVic Well-Known Member

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    I’ll give you some advice,

    Consider this, if you redraw for your house and have the one big loan, it will be mixed and you’re stuffed.

    However, if you get a split, you can see what was borrowed for income producing means.

    Then you would want any offset to be offsetting the non-deductible part of the loan (original home loan).

    From there, you could put income, rent, dividends, money you found on the ground
     
  6. Brookesy70

    Brookesy70 New Member

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    That bit I get, what I am trying to work out is for the offset account which sits against my PPOR, all salary, rent, tax returns, etc. will go into that account. The mortgage payments for both my PPOR and the IP will come out of that account BUT is it also ok if payments for living expenses also come out of that account i.e. All salary goes into the offset and then my bills/living expenses come out of the offset.

    Similarly, is it best to have a small LOC set up to pay for expenses for the IP such as rates, etc. rather than paying those out of the PPOR offset account?
     
  7. JetstreamVic

    JetstreamVic Well-Known Member

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    What you are asking is fine, however you set it up is a personal choice.

    For me, I pay everything on a credit card and then pay the credit card from the ppor offset.

    Same idea as what you suggested, just gets me points :)
     
    TopCat and Brookesy70 like this.
  8. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    craigc likes this.
  9. Baker

    Baker Well-Known Member

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    FYI,
    It is possible (with BankSA) to have more than one offset account attached to a loan, if you want to use one for personal transactions, and another for rental property transactions. The balance of both are summed when calculating the total offset.
     
  10. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Yes, there can be merits to having more than one offset to avod blending different money. The fees and rates must also be considered. Offset loans come at a higher cost in most cases v's a cheaper loan.
     
  11. ReadyOrNot

    ReadyOrNot Member

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    Hi

    I have a new investment loan based on equity from our PPOR.

    We were hoping to use the money in the offset to pay for a deposit on the purchase a new IP in the near future.

    Our broker asked us to move the money out for a week or so (either into another Offset attached to an IP loan, or a savings account) then move it back in. This way they get a commission.

    Would this affect the future deductability of interest from this new IP loan once we finally purchase an IP?

    Does it make any difference if we put it temporarily in the IP offset account or a savings account? Apart from reducing our deductible interest a little bit in the case of the offset vs getting a tiny of interest.

    Thanks in advance!
     
  12. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Yes
     
  13. ReadyOrNot

    ReadyOrNot Member

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    Thanks for the prompt reply.

    But based on Tax Tip 1:

    So in summary

    1. Borrowing money to part in a savings account will probably result in the interest being NOT deductible.
    2. Borrowing to park in an offset account may result in the interest being NOT deductible where the offset contains other non borrowed money. The interest could possibly be deductible in part.
    3. Borrowing to park in an offset account may result in the interest PROBABLY being deductible when the offset funds are used to invest at a later date.
    If you place the new IP offset money into another account i.e. an empty ‘old’ IP offset - then back into the new IP offset - would mixing be avoided and therefore satisfy option 3?

    I would feel bad if the broker did not get a commission.

    Thanks...
     
  14. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    get some tax advice. You could put it anywhere, and then back into the loan and then draw it out again before use.

    I wouldn't recommend parking it elsewhere. see 1 in the quote.