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Tax Tip 82: Taking money from an offset account on an IP and Claiming Interest

Discussion in 'Accounting & Tax' started by Terry_w, 13th Nov, 2015.

  1. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Taking money from an offset account on an IP and Deductibility of Interest

    Example

    Tom borrowed $400,000 to purchase an investment property. He set up the loan as interest only and has an offset account attached. Tom rents elsewhere. He keeps his savings on the offset account and has manage to build the balance up to $300,000.


    Currently he only pays interest on $100,000 of the investment property loan, @ 5% pa this is approx. $5,000 per year in interest. All deductible.

    But when he withdraws $300,000 to buy his new main residence the interest on the investment loan will jump up because the money is removed

    $400,000 x 5% = $20,000 per year in interest.


    Will the interest on the full $20k be deductible?

    Yes it will, because by using the offset Tom has not paid the loan down. There have been no deposits into the loan account at all, other than the interest payments.

    This is why it can be a good idea not to pay into a loan, but to use an offset account to store cash. Bankers will tell you redraw and an offset is the same thing, but they are totally different from a tax perspective – even though they may save you the same interest.

    Here is a PBR which confirms this.
    Private Ruling Authorisation Number 85315
    RBA Content | Australian Taxation Office

    See
    Taxation Ruling TR 93/6
    https://www.ato.gov.au/law/view/pdf/pbr/tr1993-006.pdf


    @newbie property is money withdrawn from home loan offset acc to buy investment property tax deductible?
     
    Perthguy, Peter P, Noah Paris and 5 others like this.
  2. newbie property

    newbie property Active Member

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    Thank you so much for this clear example, Terry!!!
    I wish I had known this when I first purchased my PPOR, I didn't plan nor thought about purchasing an IP in the future....All I wanted was to pay it off ASAP.

    Yes, you are right, the bank told me that redraw and offset is the same...I guess what also appealing at the time was that the redraw facility is free, whereas offset is provided in a package with annual charges (up to $400/yr) and a higher interest rate...

    Oh well...planning ahead is very important, as well as getting the good advice!
     
    Terry_w likes this.
  3. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    checkout my ideal loan structure thread too.
     
  4. Peter P

    Peter P Well-Known Member

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    I put money in my redraw for my first IP. Lender told me it was the same as an offset account.

    Lesson learned: if theyre not property investors themselves, walk away...
     
  5. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    This is why you shouldn't take tax advice from a lender (or broker). They don't know, are not licenced and not covered by insurance.