Tax Tip 73: Multiple Offset Accounts and some Tax Issues

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

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  1. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Plus Member

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    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
     
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  2. Bookle

    Bookle Member

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    Hi Terry, this sounds like the correct thread to ask this question. If you could kindly share your knowledge.

    Scenario:
    630k PPOR previously unencumbered - 500k equity released as I/O SVR loan with 100% offset.

    IP1 (bought last year)
    260k from equity release loan used for 20% + Acquisition costs.
    Ownership - 100% me (higher tax bracket)

    IP2 (buying in next 6 months)
    20% + Acquisition costs again to be obtained from equity release.
    Ownership - 100% partner (lower tax bracket)

    We have about $300k in private cash sitting in an offset against IP1's 80% main loan (also I/O SVR 100% offset). This helps reduce my interest repayments but technically not that ideal since I'm in a higher tax bracket.

    Since each property will have a different owner, I wanted to split the equity release loan so that interest deductibility can be tracked between IP1 (mine) IP2 (partner's). Turned out you can't do that (with CBA anyway) without triggering a loan application with loss of our previous lender's discount.

    Question:
    I don't want to split the loan and lose my lender's discount. The lender we use allows multiple offset accounts against the same loan. I plan to add another offset account to the equity release loan so that 1 offset contains the $240k remaining borrowed funds in it. And the other offset sits at $0.

    The $240k offset will then be used as downpayment (& acquisition cost) for IP2 (estimated to be $150k) - this will technically be deductible against my partner's income. However, the moment this happens, I plan to create a 3rd offset so as to quarantine the remaining borrowed funds (~$90k).

    I'll then completely fill up the empty $150k offset (IP2) with private cash so that my partner incurs no interest on the equity release loan. This will increase IP1's interest repayments against my income (I am in a higher bracket) because $150k of private cash will no longer be offsetting IP1's 80% main loan.

    Main concern is - will I be mixing borrowed funds (in the 3rd 'quarantined' offset) with private funds in the $150k offset? It feels like I'm not because the offsets are separate, however they are still collectively offsetting the same loan.

    Any other ways I can approach this?
     
  3. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Plus Member

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    Sounds messy and dangerous. You will be borrowing money parking in an offset and then lending this money to someone else to park in a different offset and possibly mixing.

    My advice is not to do this and to seek tax and legal advice
     
  4. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

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    Lending money to someone may mean you have assessable interest income and they have no deductible purpose....Get advice. Clever ideas often arent that clever. Possibly a Part IVA scheme too if there is any tax benefit somewhere
     
  5. Bookle

    Bookle Member

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    Thanks for your advice, Terry.

    Turns out I actually CAN split my loan without any penalties. Sorted within 3 days. Had another broker do it for us, we're firing the old broker who obviously doesn't have his clients' best interest at heart.

    Thanks again!
     
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  6. jomi

    jomi Member

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    Hi Terry,
    Thanks for the wealth of information that you have provided to us, it’s invaluable!

    I am hoping you can run your thoughts through this scenario and see if my understanding is correct.

    The PPOR has a loan of 700k (I/O) with 700k in the offset, hence no interest is being paid. We want to buy an investment property but serviceability is limited so we’re thinking a split of 580k (PPOR) with 580k in offset and a 120k split for deposit and costs. Pay down the 120k split and then redraw it out for IP expenses as stated above.

    New IP (I/O) loan of 400k with an attached offset account. As my PPOR’s offset is full ie no non deductible interest , can I use the IP’s offset for all transactions ie rental income, interest payments for IP and personal expenses? Or do I need a separate transaction account?

    My question is that if interest payments for the IP is coming from the IP’s offset, am I considered to be ‘borrowing’ money to pay interest as the interest will actually be higher after the payment is taken from the said offset. Also if personal expenses are muddying the waters a little?

    My simple understanding of an offset account is to view it as a savings account/cash and the IP loan’s interest is tax deductible as the use of that loan is for investment purposes. Even though all transactions are done via the offset, it has not changed the purpose of the IP loan and I can keep the interest generated fully tax deductible.

    Hypothetically, if we moved out of the PPOR and changed it to an IP 2, and we draw out all the money from PPOR’s offset account, we could claim tax deductibility on the interest on 580k, is that correct?

    Thanks again and looking forward to your insight!
     
  7. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Plus Member

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    Does the offset contain borrowed money?
     
  8. jomi

    jomi Member

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    No, just savings. Will the above be ok then?
     
  9. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Plus Member

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  10. jomi

    jomi Member

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  11. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Plus Member

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    Some aspects of it would apply. Seek specific tax and credit advice on your situation
     
  12. jomi

    jomi Member

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    Thanks again Terry!
     
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  13. codebeard

    codebeard Member

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    If I took out a $100,000 loan for investment purposes but then decided to only invest half of it at the time because of market uncertainty, can I repay the other $50,000 (that has never left the account or been mixed with other money) and redraw it for investment later? Or can I leave the $50,000 yet-to-be-invested in an offset against the loan (so interest would only be from the $50k that was invested)?
     
  14. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Plus Member

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    You could but...
     
  15. codebeard

    codebeard Member

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    Is there a better option?
     
  16. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Plus Member

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    see my tax tip 1
     
  17. codebeard

    codebeard Member

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    Thanks Terry, it's been a while since I read that one!
     
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