IP offest account all pros??

Hey everyone, I currently have a home loan secured with my investment property with an offset account. I have been keeping all of my extra funds in the offset account as opposed to using a savings account, as it is more beneficial minimising the interest payable on my home loan at a rate of 4.12% than earning interest at a rate of 3%. I also know that the interest occurred on the portion of the loan used for personal (non investment) purposes is not tax deductable.

I have been doing a fair amount of reading on offset accounts, and it seems having your (personal) money parked in an offset account doesn't seem to have the same tax implications when you withdraw the money, as compared to using a home loan with a redraw facility. Is this correct?

Or is it really better keeping your investment and personal finances separate?

I also considering in a few years using some of the money in my offset account towards a deposit for a new property to be my principle place of residence. Would 100% of the interest earned on the original IP loan still be tax deductable?

 

Good questions to get cleared up as they can make a big difference in the future, well done on thinking about these things while you can do something positive about them.

It is best to keep the purposes of all loans clear and separate.

Offset and Redraw are very different from a tax perspective. If you take the money from the offset account and use it for a deposit on your PPOR then all debt on the IP will continue to be deductible as it currently is, which is ideal. If you had been using a redraw facility this would not be the case and you would have created a tax nightmare.

Make sure your PPOR loan has an offset facility as this will be a better place to park spare cash in the future compared to your IP loan, unless the interest rate difference is large.

 

Thank you so much Hodor, great advice. Much appreciated!

 

Putting money into and taking out of an offset has no direct tax effects whether the loan is investment or not. Indirectly the interest will go up and down as money is moved in and out and this will effect the amount claimable..

 

Yes as long as it is all deductible now - no redraws etc.

 

Hey Terryw, thanks for the advice

 

I have been doing a bit more digging on the ato and found that as long as money is affecting the interest rate on the home loan, when you withdraw money it still affects the interest that is deductable, changing the purpose of that portion of the loan. (It doesn't matter whether it's via redraw or offset). So I'm starting to feel more inclined to just keep all my personal finances separate to avoid a future tax nightmare! It just seems this would be easier than having to keep records for every personal withdrawal.

 

This is incorrect.

Can u post a link to what you have read?

 

Well this has a bit about it: Rental properties 2017
but I actually called up a representative from the ato and spoke to my accountant who have both said it doesn't matter what type of account you have; if it in any way affects your loan interest than it it affects the deductible interest. But hey, I wish it weren't that way, so I'll keep digging! Would you recommend any links as good references on this topic?

 

You might need a new accountant.

Try this for starters
Tax Tip 82: Taking money from an offset account on an IP and Claiming Interest Tax Tip 82: Taking money from an offset account on an IP and Claiming Interest

 

Hey Terrw, I have read the ato link attached to the link about, which stated the following:

(vi) What happens in a dual account
arrangement if it tries to offset
present deposits and future loans?
18.
A loan account offset arrangement which attempts to link a
deposit account which presently exists with a loan account which might be taken out at some
future time is not acceptable.

What is your view of this statement?

 

I view it as correct. An offset can only be applied to an existing loan.

 

Yes but as it states it is unacceptable to use an offset for present deposits, or a future loan (obviously if you withdraw money from that offset to use for a future loan). Therefore, the tax office would see withdrawals from an offset account for personal use, as changing the loan purpose (for that portion), so not 100% of the interest charged would be tax deductible.

 

It doesn't state that at all.
Read again.

 

Can you please explain what it is saying then.

 

ok.

First look at the question asked:
(vi) What happens in a dual account arrangement if it tries to offset present deposits and future loans?

Without reading the whole document again, I am not sure what a 'dual account arrangement' is but the question is about
Current deposits and
Future loans.

So I take it that in means something like this example
X has $100,000 in a savings account now which pays interest. X has going to borrow $500,000 next year and wants to have the bank use the interest he would be entitled to now to offset the interest incurred on the loan next year.

ATO is saying no, that is not possible

 

Hey Terryw, the dual accounts they are referring to are a home loan and offset account.