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Tax Tip 9: Don’t use Cash in Offset account to Invest

Discussion in 'Accounting & Tax' started by Terry_w, 3rd Aug, 2015.

  1. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Don’t use Cash in Offset account to Invest


    Money in an offset account is cash. If you use cash to invest there is no interest to deduct.


    However where money is taken from an offset account the interest on the loan will increase but the interest will still not directly be deductible.


    There are 2 scenarios:


    1. offset Main residence loan

    If the offset account is attached to the main residence any removal of the cash will cause the non-deductible interest on the loan to increase. This interest will not be deductible because the loan is associated with a private purpose - the purchase of the main residence.


    e.g. $500,000 home loan with an offset attached containing $100,000 will mean interest is only charged of $400,000. If the $100,000 cash is used to invest, then the interest will be charged on the full $500,000. This will mean approx $5000 per year in lost deductions ($100,000 x 5%).


    2. Offset on an investment property loan

    With an offset attached to an investment property the situation is similar - withdrawing of the cash will not be using borrowed money so there is no interest to claim. But indirectly there will be because the interest on the investment loan will increase and the interest on this loan will be deductible against the investment property to which it relates.


    e.g. $500,000 loan with a $100,000 offset balance. Loan relates to the purchase of 123 Smith St. $100,000 cash is withdrawn to buy 456 Jones St.


    The interest on the loan for Smith St will increase by $5000 per year approx. The extra interest will be deductible against Smith St not Jones St.


    Does it matter whether you use offset cash from an investment loan or borrow?

    Immediately it won’t really matter. But longer term it will matter because if one property is sold there will be different consequences. Also there are advantages in borrowing as it will keep cash available for private expenses and will increase tax deductions if it is used for private expenses.


    Also there will be different consequences if properties have different owners. $100,000 withdraw from an investment property offset in the name of Spouse A v $100,000 borrowed by A and on lent to B.


    So think carefully before you go using offset account money.
     
    Peter P, Perthguy and Tim & Chrissy like this.
  2. DareDevil

    DareDevil Active Member

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    Hi Terry

    Excellent advice,
    If I have some money in offset against PPOR and I want to pay off PPOR with that and get a separate split loan for the deposit purposes for my investment what are the things to look for
    Like it is good advice to deposit all or do I have to keep any specific amount as like Stamp duty or anything like that..
     
  3. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Hi DD

    Probably best to borrow against the equity in the PPOR first. Set up a separate split - a LOC or better yet an IO loan which can be used like a LOC = money paid directly from the loan.

    If there is not enough equity then the next best thing to do is to borrow from spouses or family members etc.

    Next, if above not possible, then try to pay down the PPOR loan just by the amount you need (and a small buffer) and then set up a new split IO/LOC.

    The idea behind not paying the loan off is to keep deductions high if you were to ever move out and rent the property.
     
  4. FirstTimeBuyer

    FirstTimeBuyer Well-Known Member

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    Thanks Terry. I understand the advantage in having additional cash for private expenses etc. I don't quite follow the long term differences when sold. Could you provide an example?

    Thanks

     
  5. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Not sure what I meant by that now! But I think I meant something like this - where the loans are in different names selling one house owned by spouse X but offset account used to buy house in name of spouse Y can result in loss of deductions if spouse X sells.
     
  6. FFCHASER

    FFCHASER Member

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    Thx Terry for the tips but I personally have to use my offset cash since we cannot refinance furthur due to serviceability issue esp with the recent changes..
    plus I guess the more the debt becomes deductible the lower the taxable income so the sooner the serviceability wall? right?
    anyway around it?
     
  7. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    If you have non deductible debt you should pay this down and reborrow it to gain a tax advantage.

    If no non deductible debt and no equity then using offset may be the next option. But also consider related party loans which i will write about in the future.
     
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  8. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    And claiming more interest doesnt really hurt borrowing cap as the lenders look at gross income.
     
  9. blackenator

    blackenator Well-Known Member

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    If you dont have ppor and just have the offset against highest ip does this still apply?
     
  10. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    You should still borrow where possible rather than paying the loan down with the offset money. Once you have used the offset money if you later borrow to buy a main residence you will be paying more non deductible interest.
     
  11. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    I just though of something else, in a different thread on the issues of whether to use cash or to pay down a loan and reborrow
    https://propertychat.com.au/community/threads/do-offset-account-funds-equity.2612/

    Unless you have available equity you would only have 2 choices
    1. Use the cash to invest directly, or
    2. Use the cash to pay down the loan and reborrow to invest.

    Which option you choose will depend on the situation. If you will never move into the existing loan again then paying it down may not give any extra advantages. Same tax consequence if you use cash or pay down and reborrow.

    If there is a chance you could be selling one property at some stage then there will be different consequences.

    If the properties will have different owners - .e.g. property A owned by you and property B owned by you and spouse then there will be different consequences.
     
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  12. Fitzy1903

    Fitzy1903 Well-Known Member

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    Hey Terry,

    I'm having my loan refinanced. At the moment, our mortgage is down to $350k (value of $505k) so will able to get $70-$80k separate loan. So I'll have two loans, one loan is $350k and other $80k with separate offset accounts. So the $350k is obviously my PPOR home loan and the $80k will be purely investment pruposes. So when the $80k is redrawn down, it will go into my investment offset account, so essentially paying no interest until I use the money in the offset account. Once I use the money in the offset account (for investment prurposes), the interest will become tax deductible correct?
     
  13. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    see tax tip 1 where it is all explained
    Tax Tip 1: Parking borrowed money in an offset account https://propertychat.com.au/communi...ing-borrowed-money-in-an-offset-account.1313/
     
  14. Observer

    Observer Well-Known Member

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    Hi @Terry_w. Hope you can help me with my scenario.

    Let's say I bought a PPOR for $500000 ($400000 loan and $100000 my deposit). Later on I decide to refinance with a different lender and the valuation comes at $600000. Thus, I'm about to get $80000 equity (80% of $100000 raise in property value). All loans are IO.

    The way it's structured by the new lender is the following:

    Offset 1: $80000 (they've initially parked the equity in the offset of the loan 1)
    Loan 1: $400000

    Offset 2: $0
    Loan 2: $80000

    I then decide to move $80000 from Offset 1 to Offset 2 as I intend to use Offset 2 for further property investment. After that I transfer some of my savings to Offset 1 to offset interest on my PPOR.

    Can you see any possible contamination/other issues here?
     
  15. D.T.

    D.T. Adelaide Property Manager Business Member

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    $600,000 valuation. 80% LVR on that would be a $480,000 loan, so yes $80,000 more than your $400,000. Hopefully this is as 2 splits, $400,000 and $80,000 which sounds like it is, based on what you're saying.

    They really should have put the $80,000 into offset 2, so that it offsets itself. This is for 2 reasons,
    1) You cant say that the loan purpose for Loan 2 was to invest, since it was to offset your PPOR, therefore interest on Loan 2 is not a deductible expense.
    2) If the $80,000 was in Offset 2, then it'd be 100% offsetting Loan 2, making the interest payable on Loan 2 zero each month. Therefore, you only pay interest when you actually use it (since it'd be no longer 100% offsetting) and assuming you're using the money in Offset 2 for investment purposes, Loan 2's interest would be deductible.

    I hope all this makes sense!

    So, now you know what you were supposed to do. The real question is, will it still be allowable now that you've moved it? This is a question that's hard to answer. The tax pros on this site will probably say no, but I'm curious whether it's actually been tested in an audit assuming intention was documented well.
     
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  16. Observer

    Observer Well-Known Member

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    Thank D.T.. That's what I thought they would do. Unfortunately they put the money in the offset 1. Thus, I decided to move that money from the offset 1 to the offset 2 myself.

    Could tax pros comment on this please?
     
  17. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Contaminated if offset 1 had any cash in it while the $80k was also in the account,
    Mixed loan as a result of the contamination.
     
  18. Observer

    Observer Well-Known Member

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    Hi Terry. Fortunately, there was no cash in the offset 1 while $80k was there. I just moved $80k from offset 1 to offset 2. Then I moved some of my savings to the offset 1. From my understanding the interest on loan 2 offset by offset 2 should be fully tax deductible in such case without any issues. Is this right?
     
  19. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    See my tax tip on parking cash in an offset account.
     
  20. Observer

    Observer Well-Known Member

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    Thank Terry! Great advice there. Could you please confirm if my understanding of the following is correct?

    My loan 2 secured against PPOR is a split IO with redraw option. It's also currently got an offset account against it which, if I understand correctly, I don't really need for my investment activity.

    Thus, as per your advice in various threads, I can pay back the loan 2 in full (making sure first that they won't close it). After that it becomes a new loan from tax perspective. Then I can redraw from that loan to buy IPs. Does that sound right?

    1. Once the loan repaid in full can I redraw from it immediately to pay a deposit for an IP I'm buying or should I wait some time (e.g. one day)?

    2. Also, when paying down that loan in full does it matter what funds I use? Can I use my savings coming from an account in another bank?