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

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

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  1. LuckyPhil

    LuckyPhil New Member

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    Hi guys, I've been a lurker on this forum for a couple of years. Firstly, thank you @Terry_w for all the valuable tips and strategies. I was fortunate to have had a very helpful friend refer me to your posts and have since referred a few friends to them also on debt recycling and it has been a tremendous help to their financial situation.

    I have been searching for weeks for the answer so I apologise if this has been answered elsewhere or if I have missed the point somewhere! Before I came across the concept of debt recycling, I was in a position where I had fully offset my PPOR loan. I would now like to use the offset cash to invest and of course would like to make the interest associated with it tax deductible. Is this possible? I will use example numbers for this question.

    Current situation:
    PPOR Loan (P&I): $500k
    PPOR Offset: $500k

    I'm doing everything above board and am financially sound but for a number of reasons I would like to avoid any bank applications which involve a reassessment.

    My options are therefore:
    1.
    Split my PPOR loan into multiple P&I loans (I/O loan splits would require a reassessment):

    Split A: PPOR Loan (P&I): $300k
    Offset A: $300k

    Split B: P&I $200k for investing
    Offset B: $200k

    I would like to use the $200k split B for investing. It is possible to turn this into tax deductible debt?

    2. Margin Lending against existing shares - Westpac seems to be only around 5% at the moment. And use some of the $200k above to invest and then leverage more through margin lending and end up with some more tax deductions.

    All assuming serviceability of the loan repayments.

    Thank you so much!
     
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  2. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    1. Yes, pay the loan down and reborrow and invest into income producing assets
     
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  3. LuckyPhil

    LuckyPhil New Member

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    Thank you for the quick reply Terry! Would it be correct to do the following:

    1. Split the loan first into A and B and ensure there is a redraw facility
    2. Pay off split B of $200k and redraw to invest with no detours of the cash, avoiding the need for any loan applications/reassessments. Hopefully this has the effect of reborrowing and ensuring the loan is not mixed since it has been split?

    Thanks again!

    Found this from your post a few years back here:

    Tax Tip 19: Avoid Using Redraw on an Owner Occupied Loan

    "What about re-drawing for income producing purposes. Let's say I paid off $50k and wanted to re-draw that for a deposit on an IP?"

    "In that case the interest would be deductible, provided there is no detours of the cash. If the loan wasn't split it would be a mixed purpose loan too."
     
  4. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Yes, that should make the interest deductible if the investment is income producing.

    Just confirm with your tax lawyer or tax agent.
     
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  5. LuckyPhil

    LuckyPhil New Member

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    Thank you for helping me find the way @Terry_w. Much appreciated Yes, will consult my accountant soon.
     
  6. Zoolander

    Zoolander Well-Known Member

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    Terry i reckon if you had a podcast on iTunes, Android on all things property accounting I’d be a regular listener.
     
    Last edited: 4th Jul, 2019
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  7. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Yeah, I was planning on starting one. Its on the to do list!
     
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  8. Deck

    Deck Well-Known Member

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    My PPOR is full paid on the offset but I am not sure if I should not use a part of this cash to invest in equity if interest rates keep dropping (each drop reduce the offset's attractivity and increase assets' value)
     
  9. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    You have 3 choices from this point
    a) use your offset account money and incur interest and not be able to deduct it, or

    b) use your offset account money, pay some into the loan (after splitting) and reborrow to invest at owner occupied rates and claim it

    c) borrow against the property further and use this to invest. The interest would be deductible, but the rates would likely to be investment rates with most banks.

    or I guess there might be a 4th
    d) if you have excess cash over and above the offset account + loan limit (perhaps sitting in a saving account) you could use this. No interest would be deductible though because you have no incurred any.
     
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  10. Andy316

    Andy316 Active Member

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    Interested to learn how people go about doing this? Lets say parents have home equity or a LOC set up. Using their equity, they split loan, redraw, and transfer the money to you? Or using a LOC (with higher interest rate), they transfer the money to you. But they are paying interest.. how do you claim it against your investment income?
     
  11. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    For legal and tax reasons written and enforceable loan agreements should be entered into
     
  12. gwaipor

    gwaipor Member

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    Quick question
    I have a bunch of cash in offset in a property that just turned into IP.

    I assume I should take out the cash as much as I can to invest into income producing assets that are greater than my mortgage rate, and also maximise tax deductibility for the IP?
     
  13. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    It depends if you earn more than the interest rate. If not it might be better to leave the money there.

    Tax Tip 228: Break even points with Using Offset Accounts to Invest Tax Tip 228: Break even points with Using Offset Accounts to Invest
     
  14. Never giveup

    Never giveup Well-Known Member

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    @D.T. - given the current market one wouldn't want to dump X amount and if investing with drip feed over the next 4/5 months - I am assuming that Interest will still be deductable for the invested portion but will it have any taxable issues other than more paperwork as drip feed method may go into next FY however bank statement will show the exact amount of Intetest paid to claim anyway.

    I will continue reading the post and just wanted to flag this before I forget.
     
  15. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    Typically but not always, a clean offset will work fine.

    What needs to be avoided is Domjan V ato

    Please seek specific tax advice

    ta
    rolf
     
  16. Dan1974

    Dan1974 New Member

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    Thanks for all the tax tips Terry.

    Have a question about offset money.

    Have sold PPOR and have some excess cash after settling PPOR loans, so no non-deductible loans. If I put the excess cash into an offset account of an investment property - to reduce interest for the time being - can I use the cash from the offset of the investment property down the track for a non-deductible purpose and still claim the interest on the investment property?
     
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  17. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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  18. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    I have come across a new private binding ruling on this topic - redrawing from an offset account.
    The ATO have indicated that the interest on the loan would be deductible.
    This is clearly wrong so beware!

    If it was right imagine what could be done.

    Edited version of private advice

    Authorisation Number: 1051757477116

    Date of advice: 02 October 2020
    https://www.ato.gov.au/law/view/document?docid=EV/1051757477116
     
  19. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Strange ruling I will admit. BPRs are edited and I suspect some matters of substance were omitted from the decision we read. Its why a BPR is not a public ruling and provides no support for a taxpayer other than the specific taxpayer who had requested the ruling.

    eg If the offset money was savings would this mean the same answer ? What about partial savings and partial borrowed money ? etc
    I suspect a key piece of the puzzle was the fact that the offset only contained the borrowed funds and later use of the offset money is going to mean the subsequent inteerst charged is deductible v's the income produced.
     
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  20. Mrunal

    Mrunal Member

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    Hi Terry,
    I've been reading your amazing tips for past few weeks, such valuable information!
    Just need to validate advise I received from a broker:
    PPOR: 250K
    PPOR offset: 300k
    PPOR valuation: 600k

    1st investment property to be settled next month.

    broker advised to refinance PPOR to different lender, take equity out and put that in offset.
    another loan for IP 80% lvr.
    broker said the remaining 20% of IP & stamp duty etc can be paid from PPOR equity & it will still be tax deductible - is that correct?

    what would ve your advise in terms of refinancing?