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

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@newbie property is money withdrawn from home loan offset acc to buy investment property tax deductible?

 

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!

 

checkout my ideal loan structure thread too.

 

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...

 

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.

 

That link no longer works. Here is an updated link to PBR 85315:
RBA Content

 

Hi Terry,
Would that strategy also work if you created a separate loan from PPOR equity (fully paid off) with cash sitting in an offset. At opportune times you use the offset cash for share/securities purchases. Would the interest be deductible if you start using the offset cash at different times and potentially years after the loan is set up. I'm thinking of a GFC type event. It feels different as you are using cash, rather than a drawdown (I know the cash was created by a drawdown )
Thanks

 

Banks staff have no idea.

I have been dealing with a bank about getting a new IO loan with a linked offset to buy our latest IP.

They suggested we take out a LOC loan and put our private funds into the LOC as LOC has lower interest rates than IO loans due to APRA.

They said this is the same as having an IO loan with an offset. WTF!!!

 

Very common!

 

I don't know what you mean Greedo. Are you saying you borrowed money and put it in an offset account? I would advise against this. See my tax tip 1

 

Thanks Terry, tax tip 1 is exactly what I'm talking about. I haven't done it yet. Was thinking of parking in an offset with no contamination for future investments. It seems like paying it into the loan and using redraws for investments is the way to go. I'll read the whole thread.
Cheers

 

Hi @Terry_w,

Hope you could help to clarify the scenario below:

Porperty 1: PPOR

Year 1: Loan A: original loan for Property 1, funds in offset.

Year 3: Loan B created as equity loan for buying shares. Shares sold in Year 7, proceed went to Loan B offset.

Year 10: refinanced both loans to 30 years. Buy Property 2 as the new PPOR.

Property 1 becomes IP.

My understanding is that I can use the funds in Loan A offset to buy PPOR 2 and can claim interest deduction for Property 1.

However I am not sure if the interest be deductible for Loan B if i use offset in loan B to fund the purchase of Property 2?

Your tax tips have been extremely helpful. Thank you!

 

Loan B is already drawn so no interest would be deductible as the money not invested.
If you use the money for the new main residence the interest could not be deductible.

 

I thought so too. Thanks a lot @Terry_w

 

Hi @Terry_w,

Thank you for all your strategies and your book “things that your accountant never told you about property investing”. Thoroughly enjoy reading your strategies.

Loan1: PPOR - current loan amount $400k (original loan amount was $420k)
PPOR Offset balance is $200k and thus interest paid is on $200k of the loan amount.

Say I intend to upgrade PPOR and make original PPOR as investment property. I use the $200k in PPOR offset towards deposit/purchase of the upgraded PPOR.

Question:

1. As long as the original PPOR is advertised for rental, my understanding is interest applicable on $400k is tax deductible due to it becoming an investment property and $200k has been used for deposit if the upgraded PPOR. Also I would think the $400k loan should then be changed to IO loan from its current PI. Is this correct understanding?

 

If your loan of $400k related to the property the interest on this would be deductible once it is available for rent - mere advertising will not be enough if you are living in it.

 

Thanks Terry. What else in addition to advertising for rent would be good to consider?

Also when getting a split loan from available equity, could it be on Home loan I/O or has to be Investment Loan I/O?

My understanding is it could be either and preferred to have the split as Home loan I/O due to its lower interest rates as the applicable interest become tax deductible once the loan proceeds are used for investment purposes. Your thoughts?

 

what the loan is called has no bearing on the tax outcome.

 

Right. So if the split loan is on Home loan rates I/O which are usually lower than investor home loan is fine, as long as the reason for borrowing and proceeds are used for investment purpose - IP purchase or shares.

 

As long as you borrow for income producing assets you could claim the interest - assuming you are a resident etc. its the use the counts.