Using equity parked in offset account for multiple investment purposes. Any issues?

Hi guys, just a quick query to check I'm not getting myself into trouble with the ATO.

The short version: I refinanced my property and had the equity 'created' placed into a clean, new offset account (no other funds deposited into it so no mixing of investment/non-investment funds). I have been (yes, this is a retrospective 'cross-my-fingers-and-hope-im-not-in-trouble' post) using this equity for a number of investment related purposes, thus making the interest tax deductible.

My question is: is there any issue with using this money for multiple different investments? E.g. $2k for home insurance on IP1; $10k for a renovation on IP2; monthly loan repayments on IP1 & 2; $50k for a deposit on future IP3?

I am keeping records of where the money is going, and am being very careful to avoid any mixing by not depositing any money into the offset (I know parking equity in offset isn't recommended @Terry_w but I only just found that out).

I'd very much appreciate some advice from the tax/structuring gurus out there @Terry_w , @Paul@PFI , to know if there is anything wrong with what I'm doing (in terms of deductibility or creating accounting/record keeping nightmares down the track)?

I will provide more information in the following post, but wanted to keep this OP shorter to provide a summary for those reading.

 

The long version (background info):

I had a single loan for IP1 and IP2 after I subdivided and constructed. After generating some equity, I refinanced this loan into two separate loans with two separate offset accounts, and in the process parked the additional equity generated into IP1 offset account, which was empty and remains reserved for paying for investment expenses. IP2 offset account is used as my savings account to reduce my debt.


So, as mentioned above, the equity in IP1 offset is to be used purely for investment expenses. Is there any issue in using it for multiple DIFFERENT investments, over the course of a number of payments. I will always be paying directly from the account (no mixing) and am keeping records of what is being paid for.


Thanks!

 

My advice would be to NOT do it.

But it sounds like it is already done. To increase your chances of surviving an audit avoid having any cash what so ever go into that offset account with borrowed money. No rents or dividends.

Assuming you can deduct the interest you will have a mixed purpose loan, although all deductible.

 

Thanks for the advice @Terry_w

So, assuming I can avoid depositing ANY money into this account, is the mixed (but deductible) lone issue simply that my account will have to apportion the loan interest to the three different investments at tax time (forever?). I had ignorantly assumed it could all just recorded as 'deductible interest' without having to divide it up.

Ps: To some extent I was screwed from the start: my intention was to use the equity solely for a deposit and expenses for a future IP purchase, however (unbeknown to myself) the bank set the automatic loan interest payments for both my existing IPs to come out of this offset account (rather than each from their corresponding account, or from an account of my nomination).

 

Now you have an additional issue to seek tax advice on - mixed loan and capitalised interest.

Best to fix this up while you can

 

Ok, time to call the tax accountant...

 

If it's interest only, it should be easy enough to fix if you've kept good records - if you split the loans to reflect what you've spent, you should be all good assuming that capitalising interest isn't an issue.

 

It is interest only.

 

What exactly do you mean by 'split the loans' @Jess Peletier ? As in physically create a new loan (isn't this more about the equity in the offset account than the loan itself?) or split my 'accounting' of what the equity is spent on (i.e. when doing my record keeping, make sure I separate the payments as separate items)? Sorry for the daft question...

 

For eg, if your current loan is $500k, and includes a mix of deductible and non deductible debt (say, $400k/$100k), splitting the loan to reflect these parts can solve the issue in some cases. It will depend on a few things but will work if you're paying IO. It's a bit trickier with P&I.

In this example you'll end up with 2 loans, one of $400k and one of $500k. The total is still the same, just split to reflect purpose.

You can split to reflect the expenditure on each property, too. Which lender are you with?

 

Ok, I must admit I'm a bit confused now.
So it sounds like I have a 'mixed loan', but it is only mixed across a couple of (soon to be three) investments, so all still deductible.

Given the loan is deductible, what then is the need for splitting it into two loans?

 

Is the whole lot deductible or do you have PPOR debt as well mixed in?

is the property you refinanced an IP?

If no PPOR debt at all, it's not too much of an issue now, but will need sorting if/when you sell.

 

All IP debt (refer below).

 

Ah sorry, missed that.

In that case not a huge issue until you sell or it reverts to P&I. If you can split it now it would be best to do so though - how easy it is depends on your lender.