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.

Join Australia's most dynamic and respected property investment community
  1. Terry_w

    Terry_w Structuring Lawyer and Finance Broker - all states Business Member

    Joined:
    18th Jun, 2015
    Posts:
    14,790
    Location:
    Remote
    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    @newbie property is money withdrawn from home loan offset acc to buy investment property tax deductible?
     
  2. newbie property

    newbie property Active Member

    Joined:
    4th Nov, 2015
    Posts:
    29
    Location:
    parramatta
    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!
     
    Nattl3s, KayTea and Terry_w like this.
  3. Terry_w

    Terry_w Structuring Lawyer and Finance Broker - all states Business Member

    Joined:
    18th Jun, 2015
    Posts:
    14,790
    Location:
    Remote
    checkout my ideal loan structure thread too.
     
  4. Peter P

    Peter P Well-Known Member

    Joined:
    17th Apr, 2016
    Posts:
    142
    Location:
    NSW
    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 Structuring Lawyer and Finance Broker - all states Business Member

    Joined:
    18th Jun, 2015
    Posts:
    14,790
    Location:
    Remote
    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.
     
  6. Terry_w

    Terry_w Structuring Lawyer and Finance Broker - all states Business Member

    Joined:
    18th Jun, 2015
    Posts:
    14,790
    Location:
    Remote
  7. Greedo

    Greedo Member

    Joined:
    17th Aug, 2017
    Posts:
    9
    Location:
    Cairns
    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
     
  8. kierank

    kierank Well-Known Member

    Joined:
    20th Jan, 2016
    Posts:
    2,682
    Location:
    Brisbane
    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!!!
     
  9. Terry_w

    Terry_w Structuring Lawyer and Finance Broker - all states Business Member

    Joined:
    18th Jun, 2015
    Posts:
    14,790
    Location:
    Remote
    Very common!
     
    kierank likes this.
  10. Terry_w

    Terry_w Structuring Lawyer and Finance Broker - all states Business Member

    Joined:
    18th Jun, 2015
    Posts:
    14,790
    Location:
    Remote
    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
     
  11. Greedo

    Greedo Member

    Joined:
    17th Aug, 2017
    Posts:
    9
    Location:
    Cairns
    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
     
    Terry_w likes this.