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Using cashflow profits

Discussion in 'Accounting & Tax' started by Andrew G, 31st Aug, 2015.

  1. Andrew G

    Andrew G Member

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    G'day all,
    My scenario is that I have an account used for the purpose of having all rents deposited into, and all loan repayments come out of this same account. The minimum monthly interest on each loan account is paid and as my overall portfolio is positive, over time this account accrues money.

    My question is, can I then take out some or all of this "surplus" money from time to time and deposit into my own personal account? Bearing in mind that all IP loans are being paid their monthly interest amount, so interest is not capitalising on them.

    Next question, if the answer to the previous questions is Yes, then what happens a few months down the track if for whatever reason the expenses go through the roof or I lose a couple of tenants and suddenly this account goes negative? Can I then claim the interest on this account as a tax deduction?

    Thanks,
    Andrew.
     
  2. Sonamic

    Sonamic Well-Known Member

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    Following.
     
  3. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Is this a loan account? Or savings?
     
  4. Andrew G

    Andrew G Member

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    Terry its a LOC. It has a negative limit of up to $40K (really just a buffer account in case ....) but I keep the balance above $0 as per my above message.
     
  5. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Firstly not a good idea to be doing like this.
    If you have non deductible debt you could be using the cashflow to pay that off first.
    Secondly you would be capitalising interest if your cashflow was negative. ATO could deny the deduction depending on your reasons for doing it.

    Why not use an offset account instead?
     
  6. wobbycarly

    wobbycarly Well-Known Member

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    You know can just click "Watch thread" at the top of the page?
     
  7. Andrew G

    Andrew G Member

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    Terry,
    I currently don't have any non-deductible debt. All money that we are saving is being put into offset accounts for different IPs. This is simply the opportunity to grab some profit, having paid all relevant interest, and putting more into our offset savings accounts .....
     
  8. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Thats a good position to be in, but each deposit into the LOC is a repayment and each withdrawal is new borrowings so you are basically borrowing to pay interest. Although the effect is minimal and you are not getting an advantage of paying the home loan off sooner.

    The trouble with your original post is you would be borrowing to make private expenses if you took the money from the LOC. Best not to do this and to use the cash in your offset.

    Ideally convert the LOC to IO and just pay the interest with the excess into an attached offset.
     
  9. Andrew G

    Andrew G Member

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    G'day Terry,
    The LOC doesn't pay interest as it has a positive balance. So over time its just building up money, and not really contributing to anything as is. The way I see it, my choice is periodically either;
    1. Use some of this surplus from time to time to pay down some IP debt, or
    2. Use some of this surplus from time to time to put into our own personal offset accounts which offset interest on IP loans.....
     
  10. Sonamic

    Sonamic Well-Known Member

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    Yes I do.
     
  11. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    Set up an offset account against one of your other loans, have all your income and expenses move through there. Transfer any surplus you've got in the LOC into the offset account. Everything you're trying to do now, do it through the offset account.

    Leave the LOC as it is. Set up the interest repayments (not that there currently are any because it's in surplus). Keep the LOC for future IP deposits and purchase costs.

    This structure will get fairly close to optimizing your cash flow position and keep you safe from getting into tax problems in the future. It also gives you good access to the LOC for future investing.
     
  12. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Sorry I misunderstood - never seen anyone with a LOC with a positive balance. You are basically losing money doing it this way.

    I would stop what you are doing and park cash into offset accounts - wages and rents and any other cash and/or income. Then use the same offset for personal expenses. If all your offset accounts are the same amounts as the loans (ie. totally offset) then perhaps another property purchase is in order.
     
  13. Andrew G

    Andrew G Member

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    Hi Terry,
    Not sure how I'm losing money on this? It only has a very small credit balance (just like to keep it above $0 so no interest is payable), and is my buffer account in case I need to spend some big maintenance on any property, or a property or more have extended vacancies. Its also used on occasion to provide the 20%+costs for any new IPs by way of refinancing other IP loans.

    G'day Terry,
    Sounds like I'm on the right track then. I have several offset accounts linked to IP loans and once an offset balance gets to 95% of the actual IP loan, I setup another one and repeat the process. I've done this with three IPs already, and I'm now onto the fourth.
    With the LOC in question, all rental money gets deposited there at the end of each month, and at the start of the next month (only a couple of days difference) I pay all IP loans their required interest payment, and usually the surplus gradually increases. In the past when the balance gets to about $5K I put around $3K towards IP loans to assist in paying down slightly, but then I thought...well this is 'my profit' so in theory I can use it however I wish because by moving it to an offset account that contains personal funds, I'm not paying any interest on the LOC so the ATO shouldn't care where the money goes..... if that all makes sense (perhaps didn't explain my situation well in the first place)...

    Andrew.
     
  14. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    If the LOC only has a slight positive balance you would only be losing a little bit,, but you can keep the LOC open for an emergencies and improve your situation be depositing directly into offset accounts as this will be savinng you interest. Don't forget interest is calculated daily so you can save more by having rents paid straight in.

    You may not have a problem with claiming interest on the LOC if there is no interest, but for future private expenses it would be better to continuously set up new offsets.

    Sounds like you basically have 3 houses paid off in full - by having their loans totally offset. If you can keep borrowing then keep doing this method as it seems to be working.