Using Offset to buy shares???

Discussion in 'Accounting & Tax' started by JK200SX, 6th Aug, 2019.

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  1. JK200SX

    JK200SX Well-Known Member

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    I got asked this question earlier tonight and I wasn't to sure of the answer.

    The situation is as follows:
    - a loan split was setup against a PPOR, to be used for investment purposes, say 180K
    - the loan for 180K was drawn and the money, upon settlement was placed in an offset attached to that particular loan.
    - the offset with the 180k has been sitting in the offset, offsetting the 180k loan. the offset amount hasn't been used for anything, ie no withdrawals or payments.

    Then, shares were purchased to be used as part of a debt recycling strategy to help accelerate the reduction on the non-deductable debt against the PPOR. Now, the shares were paid for from funds from this loan split, but specifically from the offset account attached to the investment loan split.

    Is there any issue with the interest against this loan being tax deductable?

    IMO, I've always been told to purchase/pay for the investment directly from the loan, but in this instant all the money, upon settlement (ie creation of the loan split) was deposited into the offset (which hasn't been used for any other purpose).
     
  2. Terry_w

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

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  3. JK200SX

    JK200SX Well-Known Member

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    Thanks Terry, I've read that and understand why its important to borrow to invest straight out of the loan, but in this instance there has been no "co-mingling" of different moneys in the offset and should be ok?
     
  4. Yasharora

    Yasharora Member

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    I don't see any issue in claiming interest incurred on offset account provided it is only used for income-earning purposes
     
  5. Terry_w

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

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    This is answered in my posts on that thread.
     
  6. mikey7

    mikey7 Well-Known Member

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    You'd definately benefit from reading Terry's tips too then!
     
  7. Paul@PAS

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

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    An offset doesnt incur any interest.

    Loans incur interest and the offset reduces the interest. The nature of what the borrowed funds were used for will affect what % of the loan interest is deductible. However at times if the funds borrowed hit the offset then the nature of what the funds were in the offset may proprtionately impact the interest on borrowings..

    eg Fred borrows $100 and its credited to the offset. 100% offset No interest is charged. Simple.

    1. He then spend $50 on buying a new IP. The net interest may be deductible v the IP.
    2. He then spends $20 on a nice taco dinner for his girlfriend. Now the loan is blended so that 20/70 is private and 50/70 is deductible v's IP
    3. He then credits $100 to the offset from a new equity release and then draws $100 to put a deposit on a new IP. The offset itself is blended since he had $30 (which has no deductible purpose yet) in there and then credited $100. So of the new loan likely only 100/130 is deductible v's IP2. And how much of IP1 is deductible now ?? Its still 50/70 (57.14%)
    4. Then Fred spends the $30 in the offset on repair costs to Ip2. Now the first loan has three elements
    $50 IP1
    $20 Private
    $30 IP2 and ....
    IP2 loan is only 76.92% deductible.

    ATO later reviews loans and has issues regarding full deductibility of both loans. It throws its hands in the air and say they are confused. Cancels the deductions on IP1 and IP2 for interest. Taxpayer must object. Likely disallowed unless they recalculate and satisfy the ATO of the % used.

    Proving the sequence and use of funds in the loan and the offset can be complex. Better if loans are split so each purpose is distinct.
     
  8. Terry_w

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

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    It seems the ATO may allow interest to be deductible if it can traced to the loan but it is less than clear.
     
  9. Mike A

    Mike A Well-Known Member

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    Moral of the story

    Fred should not have had a gf
     
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  10. Paul@PAS

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

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    Or have bought her tacos.
     
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  11. property_geek

    property_geek Well-Known Member

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    I think that "may be" part in above statement is what OP is trying to confirm.

    The girlfriend and taco story does not apply to OP's case. Because there is no co-mingling of private money with investment money in offset.

    If I understand correctly, initially OP has offset balance of 180k as borrowed money offsetting 100% a loan with balance 180k. Hence interest incurred is $0.

    Also, above offset account never had any other monies (private or borrowed).

    As soon as OP used money from that offset to buy shares the interest started incurring.

    OP's question is: Is that interest tax deductible.

    As per @Terry_w tax tip-1 the answer is "PROBABLY".

    Below extract from Terry's tax tip-1 would apply to OP's situation.


    1. Borrowing to park in an offset account may result in the interest PROBABLY being deductible when the offset funds are used to invest at a later date.

    @Terry_w @Paul@PFI Pls correct if wrong.
     
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  12. Paul@PAS

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

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    Probably is not a word I would use in tax advice. Terry says probably as he doesnt know and cant say it is deductible. The taxpayer must review the offset and the drawn downs etc and ensure the funds are not tainted or blended and if they are must calculate the relevant impacts for each property.

    I'm looking at audit enquiry at present where the taxpayer has loans - Drawn and financed for two properties. Blended. Taxpayers says 100% is deductible. But ATO are just reviewing one property. We cannot say - Well its all deductible so dont worry about the % for this specific property since if its wrong the other is also impacted. They have to go back two refinances back and prove ALL the funds drawn were used for deductible purposes. Not just the big bits or some of it.
     
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  13. property_geek

    property_geek Well-Known Member

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    Readers interpreted it differently due to typo in above statement.

    Did you actually mean: interest incurred on loan account after offsetting it from the balance in offset account.
     
  14. property_geek

    property_geek Well-Known Member

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    I am keen to see the outcome of that ATO enquiry.
    I have a similar situation where one loan is used to fund purchase of 2 IPs. Though, I apportion the interest during tax submission, my assumption was ATO wouldn't care because it's all 100% deductible anyway.
    I am bit surprised ATO is looking at one property in isolation.
     
  15. Terry_w

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

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    I had a recent successful private ruling wth with parking money in an offset account.
     
  16. Paul@PAS

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

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    Yes will care.
    1. Firstly they want to confirm that all the loan proceeds were used for each acquisition. Its not automatic. The blended loan attaches to both properties and is a important reason not to blend loans. Sometimes its unavoidable.

    2. Then they may make enquiries as to the % apportioned. While you claim its 100% only by checking all the facts in 1. will that be valid however if the ATO officer is merely auditing one property the basis for the % apportioned needs to satisfy their requirements.

    They often single a property out. Maybe a holiday let or holiday location or their expected rations seem wrong etc. A range of data can cause this. eg it appears on a short stay rental site. Rent v costs is not conventional. One of the primary things they will then look at is private use, availability and so on. Our role is to ensure the ATO dont expand their enquiries. More is not always easier.
     
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