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Offset account/Redraw deductions

Discussion in 'Accounting, Tax & Legal' started by palmtree, 4th Aug, 2010.

  1. palmtree

    palmtree Member

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    My situation is similar to the case discussed in the following thread on this site.

    http://www.invested.com.au/4/offset-account-vs-redraw-future-deductions-34444/

    2 years ago, I bought an investment property with initial loan of $445K, I have made extra repayments to offset account (commonwealth MISA) with balance of $273K. My plan before reading the thread is to withdraw 273k to buy a new house to live in (private use).

    Reading the thread above I understanding that the offset balance of $273K will not comply with tax act if I buy house to live in (private use) using this money. But I can use the redraw account money to generate income. Is this correct for an offset account (MISA)?

    I am intending to withdraw the $273K from the offset account and invest it in term deposit. I will pay tax on (my salary + term deposit $273k).

    Lease the property and claim negative gearing on the full original investment loan of $445k and use the refund of negative gearing to pay off the new house (private use)

    Doe this comply with tax act? Any comment?
     
    Last edited by a moderator: 4th Aug, 2010
  2. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Hi palmtree - welcome to InvestEd!

    I can't give tax advice, but my opinion has always been that the money in your offset account is just like any other cash in the bank - you can do what you like with it.

    If I understand your situation correctly, currently your IP has an offset account against it so you have reduced the amount of interest you pay on the loan - that's fine.

    Now, if you were to withdraw that money from the offset account and use it for personal use, then the effective loan balance on the investment loan will increase, thus you will have more interest to claim a deduction on. That's all fine too.

    The actual borrowing against the IP loan hasn't changed - and you aren't borrowing any extra money from that existing loan to fund your new PPOR, so there should be no tax implications.

    As far as I'm concerned you've done things exactly the right way by using an offset account - if you had instead just made payments off your IP loan and then wanted to redraw that money to help pay for a PPOR, then the increased borrowing would not have been deductible.

    I'm not sure what the purpose of withdrawing the money from the offset account and putting it into a term depost is? You are actually worse off doing that in my opinion.

    If you have spare cash lying around, my suggestion is to apply it in the following order of priority (highest priority first):

    1. pay off any outstanding credit card debt
    2. pay off any personal loans (eg cars, etc)
    3. deposit it into an offset account against your PPOR (or pay down the loan if you don't think you would ever move out and make it into an IP)
    4. deposit it into an offset account against any IPs you have (never pay down the loan)
    5. invest it in a high interest savings account or term deposit
     
  3. palmtree

    palmtree Member

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    Why I mentioned Term Deposit

    Many thanks for your response, if this true I will be very lucky to get out of messy problem.

    All start when my accountant told me that I can not claim tax detectability on the full amount $445,000 if I withdrew the offset balance ($273,000) to buy a new PPOR (may be he thinks line of credit or redraw on the top of original loan).

    I believed him and started looking for solution to this problem. I found your web site which contains a lot of very useful threads. One of the threads refers me to TR 2000/2 (deductibility of interest on moneys drawn down under line of credit facilities and redraw facilities) I was convinced that my planning was wrong and my accountant is correct. I understand from reading TR 2000/2 that I can use the withdrawal money to generate income. I thought I may be can invest $273,000 in term deposit and pay tax on earned interest but still get something out of them to help paying my new PPOR.
     
  4. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    I think your accountant is mistaken - you are possibly correct in that he might think you are referring to a LOC or redraw rather than an offset account.

    Unlike LOCs or redraw facilities, offset accounts do not change the nature of the borrowed money, which is what makes them so useful to investors.

    I suggest you either clarify this with your accountant, or find a new one if he insists that money drawn from an offset account changes the nature of the original borrowing!
     
  5. AsxBroker

    AsxBroker Well-Known Member

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    I agree with Sim,

    It doesn't sound like your accountant understands that the funds are in a bank account and may think you are redrawing from a loan.

    Cheers,

    Dan
     
  6. palmtree

    palmtree Member

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    Thanks for your help Sim and Asxbroker.

    Would someone be able to refer me to a private ruling for a similar situation so i can use it as a legal precedence?
    I called the tax office today and there wasn't an expert on hand. I'm planning on getting a private ruling, however, it takes about 28days and there is a house auction is 2.5weeks.


    It seems like this is a commonly asked question. I found some more relevant information on:
    offset accounts - NOT tax advantages! - Somersoft Property Investment Forums

    There's even a discussion on the tax offices' website:
    NTLG TOFA issue 275 - 11 March 2010
     
  7. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    That discussion is not directly relevant to us, since it directly deals with the way that banks account for the income/loss involved in offering loan offset facilities to their customers. It does not deal with the deductibility of interest on an IP loan after withdrawal from an offset account - although it does suggest that the two accounts (loan + offset) should be treated as completely separate entities, which lends further weight to our argument that use of the offset account has not changed the fundamental nature of the loan account and the borrowings from it.

    Either way, that discussion is exactly that - a discussion, and no conclusions can be asserted from what it says on that page.

    At the end of the day - tax law is not a black-and-white set of fixed rules. There are many grey areas and frequently, the ATO must rely on legal advice before making judgements about certain circumstances.

    You will often get accounting professionals who disagree on the interpretation of certain circumstances in tax law - and at the end of the day, you will need to be guided by the professional you have chosen. After all, if the ATO audits you, it will be your advisor who will (or should!) be standing behind you, justifying why they advised you to choose certain actions.

    Personally, in this matter, I wouldn't bother with a private ruling - it is widely accepted that offset accounts are fine. Almost every institution offers them and many real estate investors that I know (and I know a lot of them) all use offset accounts in this way and have confidence that the tax treatment is fine based on the advice they are given. I've not heard of any investors being audited for their use of offset accounts or had their deductions denied as a result.
     
  8. Jenni

    Jenni Active Member

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    Hi

    Sim is correct. I used to work in the tax field and the offset account is just a means of reducing interest on the loan. They are two separate accounts and removing money from the offset account will not affect the deductibility of the interest on the investment property loan. Redrawing the loan or using a LOC would.

    Regards

    Jenni
     
  9. palmtree

    palmtree Member

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  10. Rob G.

    Rob G. Well-Known Member

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    You might have misunderstood what your Accountant was saying.

    You need to consider two issues.

    1) Withdrawing from an offset account linked to your IP will not impair the interest deductibility on your IP loan, regardless of the purpose of the offset withdrawal.


    2) Money in the offset account is regarded as savings, and so if you use it to purchase income producing assets then there will not be any interest deduction related to this particular money because it is not borrowed.

    Some people prefer to use some the accumulated savings in their offset account to pay down private debt such as increasing equity in their PPOR. Then they can borrow against this equity to purchase further income producing assets whilst claiming interest on the additional borrowing. (aka debt recycling).

    Some people might be planning to turn their PPOR into an IP in the future, so they might not wish to pay down the loan too fast, and so they store their savings in an offset account linked to their PPOR. Non-deductible interest is minimised whilst their IP loan is deductible.

    Its nice to have some cash as a buffer stashed in an offset account.

    However, you need work out which best suits your plans.

    Talk to your Accountant again and see if they can elaborate.

    Cheers,

    Rob
     
  11. KS

    KS New Member

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    If we are presently in an PPOR and have money in a redraw. Can we move it to an offset account prior to purchasing an IP and still get the benefits or have we missed the boat?
     
  12. jrc77

    jrc77 Well-Known Member

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    KS,

    If your intentions are to purchase a new IP then the best thing to do would be to get a separate loan account set up secured against your PPOR using the equity available (your current redraw). You then draw down on this new account when purchasing the new IP. This allows you to clearly account for the borrowings made for the investment property.

    The conversations above don't really affect you in this situation. They would if you were looking to convert your existing PPOR into a IP however.

    Regards,

    Jason
     
  13. Terryw

    Terryw Well-Known Member

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    KS,

    You have it around the wrong way. You are buying an investment property so there would generally be no problems with the claiming of interest on a loan used to purchase the property.

    You could take the money from the redraw (ie borrow) and pay for the house. But I would advise talking to a broker and setting up a difference loan for this.

    If you had money in an offset account and used it for an investment the result would be you end up paying more interest on your non-deductible home loan - something you don't want.
     
  14. KS

    KS New Member

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    We are now converting our PPOR into IP. General consensus from speaking with account is that we have missed the boat with having money in the redraw rather than offset. Tis now means that the loan balance is low on the IP so we will be positively gearing rather than negative
     
  15. Terryw

    Terryw Well-Known Member

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    Talk to your accountant about setting up a LOC to use to pay the interest on this loan. ie borrow to pay it.
     
  16. Magpie Season

    Magpie Season westernsuburbshuttles

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    Hi this thread is similar to my situation. EXCEPT the redrawn money is used for investment purposes (deposit for another IP or shares) not a PPOR.

    In that case the increased borrowing is deductable right?
    Thanks
     
  17. Terryw

    Terryw Well-Known Member

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    Possibly. It depends how you applied those funds. eg. if you withdrew to a cheque account to pay the money out then the interest won't be deductible in full.
     
  18. GregR

    GregR Reid Consultants

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    Magpie,
    I would look to go back to your lender, request that they establish a second loan facility (equal to your redraw amount available, so in effect transferring those funds from redraw onto a new loan so the lender is in the same net position) and then use the new loan for the IP.

    Most lenders would not have a problem with this, it keeps it separate for accounting and tax purposes and the use of funds has a clear path.
    Greg
     
  19. Dantheman

    Dantheman Member

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    I'm in the similar situation. Putting all my money into PPOR loan redraw account instead of offset. Now I plan to convert my PPOR into IP. If I redraw the money and put them into offset account for a period of time, say 6 months. Then take the money from offset account to purchase my new PPOR (with current one convert to IP),. Will this extra step make any difference, i.e. will it allow my interest on IP tax deductable?

    Thanks
     
  20. Terryw

    Terryw Well-Known Member

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    No it certainly won't be deductible.
    If you set it up with an offset it could have saved you.