Hi all… Im gonna throw a very general question out there. If anyone has time to explain, I would really appreciate it .
My mortgage manager was telling me that a Line of Credit is better for tax purposes than an Offset Account. While a LOC has a higher interest rate and more fees, he suggested that the we would be better off with this account.
His arguement was that if we have a loan of 100,000 and we put 8000 into the offset, we will save interest of 8% off. But he said that with a LOC, we could claim the tax of 30% of our interest that we could not claim on our Off Set.
The sensible thing to do is contact our accountant, but she is unavailable and we need to finalise this loan today to meet our “pending finance” clause on the contract.
Any ideas…?
Cheers
What a load of rubbish
Sorry BE i get so annoyed when uneducated mortgage managers try and steer clients into unsuitable products for them.
If you have a Line of credit with a limit of $100K and have only drawn down $92,000 on the basis that the entire loan is for business / investment purposes the interest charged becomes fully deductible.
If however you have an interest only loan of $100K and have $8000 sitting in an offset account you only owe $92,000 and hence are charged interest accordingly. The interest receives exactly the same Tax treatment as the LOC.
Funds can be withdrawn from the offset account at call and interest is recalculated (with most lenders) on a daily basis.
The mathmatical equasion is exactly the same except as your mortgage manager has pointed out in certain cases there are more fees, charges and the interest rate can often be higher.
If he insists on steering you this route switch lenders as the information you are getting is inaccurate.
Cheers
Richard Taylor
Residential & Commercial Finance Broker.
Licensed Financial Planner. Ph: 07 3720 1888
[email protected]
Looking for life cover – We Guarantee to beat any quote you have in writing.Richard Taylor | Australia's leading private lender
Yeah, thanks Richard…
I always thought that the tax benefits would be much the same – but hey, Im no accountant.
The thing is that when I went into see they guy, I told him I wanted an offset split mortgage. He questioned me, asking me why I would want an OS, when the tax benefits of a LOC where much greater. I didnt have enough time to stay and get more info, as I was on a lunch break between work appointments.
So, basically – there is no reason why a LOC offers a better tax outcome?
BTW: “as your mortgage manager has pointed out in certain cases there are more fees, charges and the interest rate can often be higher.” – he didnt point this out. He told mne that it all pretty much works out the same……
Break’n’Even
If a line of credit is taken out for the scheme/ purpose of avoiding tax usually through adding the interest to the loan rather than paying it off it will be caught by the tax office as an avoidance
scheme.
If the line of credit is for private purposes it will not be deductible.
It must be used to purchase property/asset that is income producing rather than for example buying a car, tv, stereo, pool, renovations to PPOR, ect.
What the LOC is used for is an important consideration !If the offset account is for a Primary residence loan it will save you money as the loan is normally not tax deductible.
An offset account will save you $640 in interest and cost you $192 in tax due to more income resulting from the nett property income or loss. but you will be $448 in front after tax.based on 30% tax rate.
If you need to access the $8000 you can at any time.A LOC will cost you in interest (8%) on $8,000 an amount of $640 to save you $192 in (30%) tax. That is still a $448 loss after your tax refund.This doesn’t sound like a good deal to me.
if you are just over the medicare surcharge threshold (no kids couple) its $100,000 (not a combined income but rather each individuals incomes) then this might bring the income below the threshold and thus save you an extra $1000 in surcharge tax it could be worth while..
http://www.ato.gov.au/individuals/content.asp?doc=/content/mls_booklet.htm&page=6&H6Comments are of a general nature and may not be relevant to your individual circumstances. If you intend making any investment, financial or taxation decision you should consult a professional adviser.
Hi Breakeven. The fact that you mention LOC and tax in the one sentence, and that your lender has pointed this out, I assume you are borrowing for investment or business purposes? A LOC is generally used when refinancing to release equity in your home, and is often best when part of a split loan. (ie $400 k house, loan for $200k, refinancethe 200k, and add on borrowings of another 100k, which could be split into 50k LOC, and leave the other 50k ‘in redraw’ with the rest of the loan. ) You would normally use the LOC for investment purposes, such as deposits on investment properties, shares, rates etc and then in turn have your rental income etc going into this. The idea that your personal and business/investment parts of the loan are kept seperate, so at tx time you have a seperate statement for your LOC – with interest as tax deductable, which of course it is not on your own home. The idea being any extra repayments go into the principle and interest part of the loan, with the LOC being interest only. You would access the redraw in the other part of the loan for your personal use, holidays, buy a new car, whatever etc. As mentioned already though, in virtually every other scenario, using the offset account, even free redraw on the main loan is the more popular/cheaper option, and if you are simply just buying your own home, can’t for the life of me work out why you would need an LOC at this point. Personal opinion only of course[biggrin]
Hope it all went well.[strum]I agree with Richard – what your mortgage manager said is not only wrong, but could cost you if you were to listen to that ‘advice’. What happens to all the people that just believe these things?
It is very annoying when I ring lenders and ask if they have a 100% offset account and they say “no, but with have redraw which is the same” – its not!
Terryw
Discover Home Loans
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Send an email to get my newsletter.Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
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Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
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