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

Wow, that's a little unsettling!

We have time though, so will definitely get the right advice.

 

For example I think it would be a mistake owning shares jointly.

Compare
A and B jointly owning $100,000 worth of ABC shares,
and
A owning $50,000 worth of ABC shares, and B owning $50,000 worth of ABC shares.

Consider the taxation and estate planning consequences of the above. I want you to write a 500 word summary for us please.

 

Hi Terry

Would you have a link to this tip.
I'm not sure my question relates to this thread, - I have paid down my PPoR non-deductible loan (but have the deductible loan against PPoR that is not fully drawn) and have some cash from an IP sale that will be used for investing. Where can I park this until it is reinvested?

 

Hi Mac

I think that would be the first one:

Tax Tip 1: Parking borrowed money in an offset account Tax Tip 1: Parking borrowed money in an offset account

 

Thanks Terry, tax tip 1 is about borrowed money, but you're indicating that the same would apply to cash?

 

That quote appears to be post number 19 in this thread. It was referring to another post where the person was thinking about borrowing money and parking it in an offset account - with cash potentially.

 

I think in your case the cash is just cash - it did not originate from a borrowing that you wish to make deductible based on future purpose.

If you had non-deductible debt then the obvious solution would be to debt recycle your PPOR loan, but as you don't, I think you can just park the cash in any general purpose account.

Before selling your next IP however, it may be worth adding settlement instructions to open a new undrawn loan, secured by a term deposit that holds the cash that otherwise would have been transferred to you upon settlement. Once you draw upon this loan for the next IP's deposit and costs, that loan becomes deductible, and you could possibly have the IP 100% financed. Further down the track when the new IP appreciates, you can substitute the security for that loan over to the new IP and release the term deposit cash.

Unless of course your goal is to reduce your total borrowing (not a bad idea in the current climate) in which case you would do just as well with cash as you have now.

 

Thanks @chylld and @Terry_w, am brushing up on Tax tip 1.

Yes, in consolidation phase. Am using this money for those evil things called shares... diversification.

 

I missed the notification of a reply to this thread and have been reading mostly the LIC thread. I will have a look to see if I can figure out what the difference may be over the next few days.

 

Hi @Terry_w

Trying to understand the implications of this. Say $100K was taken out of an offset against an IP (IP1) loan under the name of Person A, and used as a deposit for another IP (IP2) owned by Person B. Initially, I assume the interest on the $100K would be deductible against Person A's income.

In future, when IP2 is sold, if the proceeds from sale are deposited into a completely separate account, will interest on the $100K still be deductible? I assume "no" as the investment to which it relates to has been sold?

 

The extra interest on IP1 would still be deductible. The $100k was never borrowed money

 

If IP1 is sold obviously deductions will be lost (which I think is the same as your example above). But if there is no intention to ever sell IP1 (or for spouse X to sell), are there any issues you can think of with using IP offset funds to invest further?

 

Yes, lots of non tax legal issues to consider such as estate planning, asset protection, control, related party loan strategies etc.

 

This is same with jointly owned IPs.

If Fred and Mary owned a IP jointly and Mary borrowed all the funds to buy it then on Marys death Fred may inherit Marys 50% share. However the bank will want the loan paid out. The loan cant be refinanced as such since Fred is the 100% owner.

At best it would be a 50% deductible loan if the new loan taken by Fred fully refinanced Marys old loan. But if Mary had used her loan to buy just her original share (and not also Freds) I suspect NONE of the refinanced loan is deductible.

A tenants in common interest can sometimes be a better alternative. It also means that a right of inheritance isnt automatic. It can open some tax strategies. eg 2 years CGT free ?

 

OK. If the scenario was changed so that IP1 was owned by Person A, then funds from offset were taken and used to purchase IP2 also owned by Person A, then would there be any issues?

You mentioned a couple of times in this thread that there would still be consequences, particularly if one of the IPs were sold but I couldn't find an elaboration. Would you mind enlightening us? Thanks.

 

Its a very broad question.
Yes still the same issues to consider. Do they have a will, what does the will say? for example.

 

@Terry_w Would like to get a clarification on the interest claims for investment property.
Can I claim the interest for the previous year if i didn't do it?
We have bought an investment property and my wife took a personal loan to pay the initial deposit. I wasn't aware of the interest deductible for the investment loans, and we haven't claimed the interest for the personal loan. So just wondering if we can claim the whole interest which was paid in the previous year as well on this year lodgement or should I go ahead and amend the previous year tax statement?

 

you would need to claim the interest in the year it was incurred which would mean amending the previous tax return probably

 

I just bought first IP using a equity loan separate to ppor mortgage but with same bank.

If i pay IP loan with the new bank down wont this be less deductions?

Should I be paying down PPOR first? Only have a redraw no offset

 

Yes if you pay a deductible loan down you will get less deductions.