I'm sure this question must have been asked before but despite searching I can't seem to find it, so I would be very grateful if someone could answer it for me. If you were to use 100k from a LOC as a deposit on a IP and then deposit 50k of savings into an offset account attached to the LOC, A) Could you still claim tax relief on the full 100k of interest even though you were actually only paying interest on 50K? B)Or would you be better off simply paying off 50k of the LOC loan with the savings? Thanks
No - you can only claim the interest that you actually pay. If you have money in the offset account, you will pay less interest, and thus will only claim the interest paid. So you get less of a tax return if you have money in an offset account ... BUT you pay less in interest, so you are better off anyway. Always better to pay money into an offset account rather than directly off the loan, as if you need to draw back the money for personal use, there won't be any questions about deducibility.
Very true, but on the other hand if you purchase another investment one day, you will get no deduction for the $50k and the home loan now has original non-deducatable debt. Here it is better to pay the $50k into the loan and then some time later re-draw it to purchase the investment. Now your debt has deductable interest. But only if used for investment, otherwise use the offset account.
mmm ... I wasn't working from the assumption that there was a PPOR involved with the offset account ... although there certainly might be - and it does require a different approach as you mentioned. However, I wouldn't just deposit capital into a loan where there is a potential for mixed use of money (ie investment and personal), without some careful planning in relation to how I was going to be accounting for which was personal drawing and which was investment drawing. In particular, pay attention to what happens if further payments are made into the account - do they pay off the investment or the personal part of the loan (and the ATO may view this differently to you !!!). Clear separation of these loans is a better approach - loans split into multiple accounts are usually available from most lenders. For stuff like this where it is so easy to get it wrong, I would always be seeking advice from a good mortgage broker and your tax advisor to ensure that you preserve your deductibility (and sanity!) and maximise your flexibility.
