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Offset account vs Term deposit

Discussion in 'Investing Strategies' started by rinatge, 19th Oct, 2010.

  1. rinatge

    rinatge New Member

    Joined:
    19th Oct, 2010
    Posts:
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    Location:
    Melbourne, Vic
    I've been reading through the information in the forum (weatlth of knowledge, thank you) but I couldn't find a discussion comparing offset account and term deposit.

    I recently purchased a house as IP and I'm trying to compare the benefits of leaving funds ($50K) in the offset account vs keeping it in a term deposit. I know that I will pay taxes on interest in the term deposit but running the numbers it seems that it's still worthwhile maintaining the full interest amount and receiving tax return on it.

    My income situation is between 38% marginal tax.

    Any advice?
     
  2. jabba_jones

    jabba_jones Well-Known Member

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    2nd Dec, 2007
    Posts:
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    Location:
    Sydney
    I did some quick numbers (not sure how correct they are..). Values for example where: $50K Cash, 38% tax rate, 6.77% Mortgage, 6% Interest in term deposit.

    I get slightly better off ($200) having money in an offset account for an Inv. Property. If it was a PPOR you're $1500 better off (due to non deductablilty of interest)

    Attached is the spreadsheet for my calculations, I also threw in a calc for after July 2011 when the first $1k of interest earn't gets a discount. For smaller free cash amounts this makes the savings account more attractive.
     

    Attached Files:

  3. rinatge

    rinatge New Member

    Joined:
    19th Oct, 2010
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    Location:
    Melbourne, Vic
    Thank you for those numbers. What about the tax return from interest on the mortgage?

    With the offset the tax return is reduced (because the interest portion is reduced) in comparison with the term deposit option.
     
  4. jabba_jones

    jabba_jones Well-Known Member

    Joined:
    2nd Dec, 2007
    Posts:
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    Location:
    Sydney
    Since you paid less interest, you get less of a deduction; you pay more tax and ultimately less of a tax refund.

    Say you didn't pay $1000 of deductable interest due to an offset, you wouldn't have a $380 deduction. So yes you pay $380 more to the tax man, however you still have your $1000 in your hand.

    J.