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Tax Tip 73: Multiple Offset Accounts and some Tax Issues

Discussion in 'Accounting & Tax' started by Terry_w, 30th Oct, 2015.

  1. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

    18th Jun, 2015
    Generally it would be better to have the offset account attached to the main residence. This is because the main residence loan is not deductible. The interest on a non deductible loan costs you much more as you must pay for it with after tax dollars..

    Some people feel a need to have a separate offset account for each investment property. There is no need for this from a tax point of view. In fact it will be detrimental to the borrower as they will end up paying more tax if these accounts are attached to the investment properties and they will be diverting funds from paying off the non deductible debt sooner.

    Others like to segregate cash into different accounts as a savings strategy. This can be a good idea, but where these accounts are not offset accounts you will be losing interest savings. Some banks allow multiple offsets on the one loan, others don’t. Where your lender doesn’t it may be possible to use just 1 offset and maintain a spreadsheet to track what the cash in the offset is for - holiday, savings, retirement etc.

    Where the main residence loan is paid off then there should be an offset on at least one IP loan - you have to get your wages and rents paid somewhere so might as well maximise interest savings by using an offset account.

    But where there are several IP loans and where these are at different banks it may be good if you have the ability to add offset accounts to these as recently there have been lots of changes with interest rates. It would be best to have the offset on the loan with the highest rate. As rates change the money in the offset can be moved around to save the most interest.

    And where the properties have different ownership structures - joint, single etc the money in the offset can be moved around to take advantage of maximising deductions for the higher income earner while maximising income for the lower income earner.

    For example
    A is on the top rate of tax and B is not working and has no income. They have $100,000 in cash and a main residence fully paid off. They also have one investment property each. If the $100,000 is placed in the offset account against A’s investment property then A will pay about $5,000 less in interest per year. That is the same as earning $5,000 in extra income. He will then pay 47% of this in tax of $2,350. Whereas if the $100,000 is parked in the offset account against B’s loan then B will save about $5,000 in interest and have a $5,000 boost in income. But because B’s taxable income is under $20,000 no extra tax would be payable. This is a $2,350 per year saving for the family.

    But wait - don’t do this without careful consideration and advice. You need to consider the legal implications, who the money belongs to, asset protection and other potential strategies such as the spousal loan strategy. Pooling money together can be good or it can be better to keep finances separate
    S0805 likes this.