Join our investing community

Investment loan offset account

Discussion in 'Investing Strategies' started by lknight, 18th Feb, 2011.

  1. lknight

    lknight New Member

    Joined:
    17th Feb, 2011
    Posts:
    4
    Location:
    Perth
    Hi,

    I've only recently joined this forum and I've found some of the discussions quite interesting. I'm just wondering if I can bounce an idea off everyone and see if I'm missing anything important.

    My husband and I have our PPOR (mortgaged with an offset) and we're getting ready to settle an IP. We're going to be getting some extra funds ($25k) that were originally going to be used for something else but they are no longer going to be required. We have been considering using the money to start investing in shares (we are currently only exposed to property and cash and want to diversify a little) but have heard that there can be issues with tax deductability if money from an investment loan gets mixed with regular funds.

    We were thinking of getting an offset account attached to the IP home loan and parking the money in there whilst we are organising the shares. We'd put the income from the IP and the extra $25k in there which will help with any shortfall on the mortgage (it's only a 50% mortgage so the shortfall will be minimal) and then take from that to purchase shares. If we keep that account solely for any costs for the house and to purchase shares, will that keep the tax deductibility on all of the interest on the loan? What happens if the money in there builds up and we want to skim some off the top for personal use?

    Thanks for your help :)

    Lisa
     
  2. builder2818

    builder2818 Well-Known Member

    Joined:
    31st Dec, 2008
    Posts:
    89
    Location:
    Sydney
    If it's only a 50% mortgage it sounds like the property will be positively geared. What will you do with the rental income? You can claim the interest charged by the bank as a tax deduction against your taxable income.

    This also includes if you draw down on the offset funds for investment purposes. So if you buy shares with the money, the interest is a tax deduction. It probably wouldn't be a good thing if you're dipping into the offset accounts funds for personal spending. You can do it but it will probably just be a bigger paper trail at tax time trying to calculate what money was for investing and what was for spending. You could always just use your personal accounts for spending, maybe using some of that $25k in your day to day account in case you need to draw on it.
     
  3. lknight

    lknight New Member

    Joined:
    17th Feb, 2011
    Posts:
    4
    Location:
    Perth
    Thanks, we'll be pretty close to being positive. From the calculations using estimates of the PMs fees and mortgage repayments, it's borderline so it'll be hard to know. If we have money in the offset account it'll probably bring the repayments down just enough to make it positive.

    We have enough of a buffer in our offset account for our PPOR for any personal spending we'll want to do for quite a while so we basically want to keep this separate and grow it as much as possible.

    My husband wants to drop down to part time work within the next 3-5 years so we want to grow the capital we have by having any rental income / dividends go back into that account and then skimming money off the top to reinvest it. Then when he wants to drop his working hours we can stop reinvesting all of the excess income and use it supplement his working income.

    This is the only thing I'm not too sure about though. When we get to the stage where we are getting a better income from the investments and want to use it to cover some of his salary, would the safest way be to just start redirecting the investment income to our personal offset account so we won't be withdrawing money from the account where the investment loan funds went into?

    I'm quite possibly being overly cautious but I've heard some things about people putting some of their own money in with investment funds and then taking the money back out again for personal use and losing deductibility on a chunk of the money that is left because it was then technically mixed purpose funds.

    eg. If someone had $20k of funds they had borrowed for investment. Topped it up in an account with another $10k of their own funds. Later down the track, they decided they didn't need the $10k in there so they took it out again to spend on something personal and left $20k still in there. Apparently their accountant then only allowed tax deductability on a defined proportion of the $20k left because the money was all mixed together. Does that sound right or has wires been crossed somewhere?

    Like I said, probably being overly cautious for what would potentially be a small difference in tax bill over time but I'd rather do things somewhat properly from the beginning if possible.
     
  4. GregR

    GregR Reid Consultants

    Joined:
    13th Jul, 2009
    Posts:
    273
    Location:
    Berwick Vic
    Lisa,
    Without knowing your financial position, it sounds as if you have an existing mortgage on your PPOR (with offset), you are about to settle on an IP and only borrow about 50% and have an additional $25k you may use to invest in shares but want to park it in the IP loan offset in the short term?

    The deductibility for tax purposes relates to use of funds and the easier and clearer the trail of the use of funds, the better it is to be able to establish that use in case of a tax audit. The advise not to mix the use of funds between private use and investing is valid as each time a loan is increased or a further drawdown occurs, it becomes another separate use of funds.

    As to where the investment income should be directed, my view is it should go to your PPOR offset, that is a far more effective return on funds than using it to pay down an IP loan while you have a PPOR non deductible debt.

    I would question why you would only leverage to 50% on an IP when you have a PPOR mortgage still to pay down (or at least use the offset account).

    Good luck
    Greg