Offset account vs Redraw for future deductions

Hi all,

I have a question I would like to hear your opinions on. My situation is this - I plan to buy a property, and will be occupying this initially. I do plan to rent this out in 1-2 years' time.

My question has to do with the tax deductability of the home loan structure. Ideally I would have an 100% offset account, into which I can deposit all my surplus funds in order to minimise the interest while I am occupying it, and when it becomes an investment property, I can then withdraw those funds for whatever purpose I see fit. The full amount of the interest payable on the loan at that point, will be tax deductible.

However, will the same result be possible using a redraw facility? Say I make $50k additional repayments into the loan while I am occupying it, which will reduce the interest payable. Then, prior to renting it out, I redraw that $50k to bring the loan balance up again. At the point I rent it out, will the full amount of the interest payable be tax deductible? Or will that $50k be deemed ineligible as a investment cost, thus forcing me to apportion the interest payable?
To me, it seems to basically boil down to whether the transactions prior to the property becoming an investment, are relevant.

Any opinions on this?

Thanks for any input.

 

Ach,

Your basic understanding is correct.

Go for the offset account and you can do what you want with the 50k.

If you put the 50k in a redraw and then redraw it for non-investment purposes (a car) then you lose the tax deductibility of the 50k.

Always keep your investment borrowings completely separate from anything else.

Tailcat

 

Thanks for the reply tailcat.

Just to confirm what you’re saying – do you think I will lose the tax deductability of the $50k, even if the redraw is done well before I turn it into an investment property?

A bank employee told me that what I do before the property becomes an investment, is irrelevant. According to her, the ATO only cares from the point at which it becomes an income-producing asset. Does that make sense, or is she ill-informed?

 

Yes what you do prior to it becoming an IP does matter.

The deductible portion of your loan will be that part that represents the cost of acquisition (or improvements) OF YOUR IP.

Any redrawing for private purposes prior to vacating and renting will not be interest deductible.

TR 2000/2

The bank employee may have been quoted out of context as your advice sounds incorrect - I hope you neither paid for nor acted on this advice.

Always get specific advice to your personal circumstances from an qualified Advisor BEFORE you act. This forum is necessarily general in nature due to brief facts and uncertain context.

Cheers,

Rob

 

This is a very good example of why you should not take tax advice from someone not qualified to give it. Utterly hopeless. I wonder how many people have taken her advice though?

 

Thanks for the info guys.

Yes, I do think the bank employee didn't know what she was talking about. Thing is, I even had a conversation with her manager, who was of the same opinion.

I want to get a professional opinion from a qualified accountant/tax advisor, but I don't really know where to look. I rang up an accountant who claimed to be a tax specialist, just out of the Yellow Pages, and he quoted me $330 an hour! Not only that, he specified upfront payment before any sort of consultation.

I balked at the $330 fee - I mean, it would take at least half an hour to properly go through my specific situation, so even before I have any clue as to this guy's competence, I am up for at least $175? Sounds pretty steep to me.

Is this the general ballpark figure for tax advice though? I have never consulted an accountant or tax advisor, so have no idea what to expect.

Also, I would love to hear if any of you can recommend a good tax advisor. I work in Sydney CBD, so that would be ideal.

Thanks in advance for any information.

Andrew

 

Can't help with recommendations, except to say that any decent Tax Agent should be able to cope with the problem based on your previous facts.

Whilst acting based on the rulings might absolve you from penalties if you "reasonably believe" they apply to you, it is important to note that if you act without fully understanding ESPECIALLY if you did not seek advice then this may not help you.

Take a read of these on the ATO website (search Legal Database)

TR 2004/4 Interest before income commences

TR 2000/2 Redraw & LOC

TR 93/6 Offset accounts

I always shudder when I refer anybody to them, as many people seem to read into these opinions much more than I do. I guess a layman is more ready to make inferences and jump to conclusions - BEWARE !!!!

That is what you pay for - the interpretation of where the boundary lies in your particular facts.

Cheers,

Rob

 

I found this ruling an amusing read. The way that the examples in the ruling are described is quite droll, indicating that at least one person in the ATO still had a functioning sense of humour.

 

Aren't redraw and offset really the same?

Hi all, thought I'd bump this old thread. I had a loan pre-approved (whilst I was still working) with State Custodians for an investment property. They told me the loan had an offset (all-in-one) account. Now that I'm about to make an offer on a property, they are telling me that it is in fact a redraw account, but works exactly the same as an offset account in that I have full access to any extra repayments.
My plan was to put about $300,000 straight into the offset, and then redraw it in a few months time as a deposit on a principal place of residence. Does this mean the interest would lose it's deductibility?

Thanks
karen

 

Hi Karen

Yes you would lose deductibility.

Many a lender says that the offet is the same as the redraw. It may work out the same in terms of interest charged, but not in terms of tax. And $300,000 would work out to be a lot of tax savings.

 

So frustrating. They shouldn't be allowed to advertise it as an offset account... so dodgy. I've gone with another bank now that has an offset, but am barely getting over the line as I'm still on probation at my new job and on lower pay (career change). Waiting for final approval, but will probably only be able to borrow about 78% of property value. Hmmff... banks