Is it possible to somehow use my personal savings (~$10k – $15k, a buffer so to speak) to offset interest in my IP loan?
That is noting that I will want to use this money for personal use at this stage in the short/medium term. Note I have no debt on my PPOR, only debt on IP. It would be nice to think it could sit in a personal offset account that is linked to my IP loan, but I'm not sure if this is allowed, or complicates the tax return.
Just rang an accountant actually and they told me there was no way to achieve what I asked! ???
Yes, you can set up a 100% offset account linked to your investment property loan. You will not be paying down the loan with any deposits to the account. It is totally separate to the loan with its own account number so you can make deposits and withdrawals without tax consequences. It is very common and I have been doing it for years.
Maybe you didn't explain it properly to your accountant. Try again and if he disagrees ask him/her to justify it as it is costing you money to take incorrect advice.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Thanks Terry,All – I'm looking at a St George Portolio Loan (LOC) / Advantage Package arrangement. What would you recommend as a good way to set up the accounts? I have no PPOR debt.
Questions still outstanding for me are:
* Can you get an offset account against a LOC, or does it have to be a normal loan? (i.e. in which case if my main buffer/deposit loan is going to be a LOC then I guess I would need to use the first IP loan for the offset arrangement). Would be nicer if I could get an offset account against my buffer/deposit LOC loan.
* Can the Offset Account be used as a personal savings account, or do I need a separate personal savings accountFor example, but what accounts I mean something like:
* IP Loan 2 (Property 2) – normal interest only loan* IP Loan 1 (Property 1)- normal interest only loan
* Offset Account [incomes come in here, offset's interest from IP Loan 1]* IP LOC (Buffer / Deposits, against PPOR)
– credit card against LOC [for investment expenses] – possible?
– cheque book against LOC – possible?
– rent comes in here, IP expenses are paid from here* Personal LOC (for personal emergency) – normally not used (as no interest if this is +ve)
* Personal savings account (keep very low, as most personal money is in the Offset Account above)
– not sure whether I could just use the Offset Account instead of this?* Personal VISA account [personal bills]
* Personal Cheque account (not sure if these needs to be a separate account?, or just have a cheque book against the personal savings account, years ago they were separate to minimise fees)
Thanks heaps
Offset accounts cannot be set up against LOCs – the Portfolio with St George is a LOC.
I would only use the LOC for the account to be drawn down on for investment expeses and deposits. These should be set up any spare equity.
Set up a IO loan for the main investment loans and connect a 100% offset account to this. All money should go into the offset. Don't pay any money into the LOC or it will be locked away with potential tax problems when taking it out again.
All expenses should probably be paid for by borrowing money from the LOC. The cash you would have used can be stored in the offset account. This is not a big deal as you don't have any non-deductible debts, but it may be a good idea if you want to upgrade your main residence later – ie take out a new loan to buy a more expensive one.
You cannot set up a credit card on the Portfolio loan. These are just set up in your name and you can chose how to pay it as you like. If you are using the card for just investment/business expenses then you could borrow from the LOC to pay for it.
No real reason to set up a savings account as you will be using the offset account for this.
LOCs can have cheque books which come in handy when paying deposits etc. You could probably also get a cheque book linked to the offset account for the personal stuff.
With the portfolio the LOC can be split into up to 10 accounts and the limits on these can be changed later. So you can readjust things as time goes on and your circumstances change.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
thanks Terry – this is all making sense
What have you/others found is better to do re the question of whether you have:
(a) one sub-account for all of your IPs (i.e. all rents, all expenses come to/from this one sub-account) versus
(b) one sub-account per property (i.e. for rent and expenses)
(c) some other arrangement: perhaps all rent into one sub-account, all expenses into another for all properties?Any advice from those who have experience?
Seems to me like option (b) may be nice, however from a tax perspective item (a) should be fine no? i.e. in one's tax return everything gets bundled up into one overall loss/profit for all your IPs? Or is there something I'm missing for which a tax agent would really benefit if you used a sub-account per property?
Thanks again
PS. Add to the previous post I just did………….just thinking through the logistics of arranging the in's/out's if one was to go for one sub account per property:
* Cheque Book – I assume you could get the bank to give one cheque book per sub-account to use? If yes then this would be ok.
* VISA card – The St George Portfolio loan gives you one VISA card (no fees) I think, however this would be a separate account. So you may have to then card expenses for several IP's into this VISA card, and then I guess ideally you would be off the card from the appropriate sub-account at the per transaction level? This would seem too much overhead. How do people normally handle VISA card based payments for expenses across the sub-account per property setup?
* Rents – I assume you could get the bank to provide separate deposit cards / BSB-Account numbers per sub-account?
* General costs – umm, I'm trying to think if there are general expense costs that would be generic (i.e. and not charged per property), and in which case how to cater for this.
I would never recomend paying any money into a LOC at all – except to pay the interest. All money including wages and rents should go into the offset account.
But in your cash you have no personal debt so you could pay it into the LOC – but this will make you lose flexibility if you ever wanted to get the money out for personal reasons.
I personally would get all income into the offset, maybe pay expenses with one visa card and then borrow to pay this. All other property expenses would be taken from the LOC. I wouldn't bother about multiple accounts myself. I would just pay the interest on the LOC.
Once you get the offset account up to a certain level you could possibly look at paying down the LOC – but only if you are sure you will never need the money for personal stuff.
You will also be paying a 0.1% extra on the LOC.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Hi,
This offset account for investment purposes (with some personal use) seems a great idea. I have spoken to several people including the ATO and have heard differing views. The 07-08 etax software mentions LOCs but not offset accounts. Is there a good ATO reference case or article that confirms this? I love the idea – I just want to be sure and not get caught out!
interesting thread … One of the big four does actually have an offset within an LOC (portfolio) … [though they generally do not use brokers and where they do is with a minimal return] .. it is useful if one has the savings, and multiple positive balance accounts can be offset against a single nominated portfolio account (which cannot be fixed – and should not be nominated investment) .. it can work well where high cash flow contributes to cash savings against funds initially split off an investment loan (forming 2 accounts, one of which is the account being offset) .. the account being offset remains variable (which, if savings remain a constant, it doesnt matter) .. which also means, within the LOC portfolio arrangement .. as there is no interest on the variable component (if you structure it right), there is no ATO concern as a) no interest on the account being fully offset is paid (there being none where savings levels are maintained), and specific investment accounts (which does not include your initial split)within the portfolio are clear (with no personal income washing through them).
Yes, one can also use a drawdown for 'other stuff' – like a timely buy and sell of B&B for a 26% return for example .. so long as the nominated offsets do not include ones 'living' account .. all is well (for us
)An offset should not be against a specific investment account within an LOC arrangement – for clarity if nothing else – but, I understand it MAY be if 'outside' an LOC arrangement (but then I always wonder if the prime purpose of the arrangement would negate its value if challenged as there would potentially be variable in the interest claimed.).
We manage to reduce average impost of interest (as a chunk of money becomes 'interest free' in effect) and use the CF+ to knock down the balance in the offset (no longer investment split) account – as reduced (depending on the timing of loan rollovers) we can a) split a further chunk off an investment account and repeat the process or b) draw down more into the account being offset and make a lump sum payment on a investment portfolio account with the same effect.
We have continued to 'cash up' as some say here – so there is no redraw from the accounts being offset (our 'living acount is not a nominated offset account) – and hence, no transferal of investment to personal debt. In that context it is critical that the amount being offset and paid down does not exceed the cash at hand.
Yes Terry – we be very much Somers/Lomas converts
.. despite the screwed up noses – it works wells for us Might sound complicated LOL … we explained to the bank how we thought the structure of their product could work – and after a fortnight of thinking they agreed – as the arrangement cannot impact the overall level of the LOC .. simliarly, accountant ticked it off (though wondered why we prefer to retire debt) and the folk without humour had no major challenge as the representation of offset is paid debt (IF, no 'living' funds are washing through it).
But of course, our arrangements and/or rulings and such, are not others
… so …………………Understand that none of the above in financial advice – and you should sus out your own arrangements in the context of your own personal circumstances.
One suspects the etax software wont mention it simply because one cant wash personal funds through against an investment loan – or the redraws become non-deductable debt.
OK… I understood next to none of that!
I am with you Andrew i didnt understand a word of that.
I fail to see why in the world you want a offset account within a LOC but each to there own.
Richard Taylor | Australia's leading private lender
Ta Richard .. is OK, the accountant, financier and tax folk do … that such an arrangement is available within an LOC suggests that some folk do actually find it useful – or it wouldn't be a part of the product … understand your comment re 'within' and LOC, however, the effect is the same inside or out (and you may labour under the notion that all offset funds are in fact ours – different folks different structures) ..
in any event, the thread was whether an offset can be utilised against an IP.. and the answer is that there are apparently 2 different ways of achieving that ..
TerryW outlines one way which is also sound – which provides for 'paying down' the LOC once offset $ reach a point of comfort .. we just dont like the mucking about.
T'was just a contribution
… and it save us .. well, a lot We guess we dont follow the crowd much – even in finance
.. the three brokers we yakked to scratched their heads too until they saw the resulting composite interest rate on the portfolio …As we said .. depends on individuals circumstances, earnings, savings regime, risk profile and so on
be well
.. RMy own small portfolio of 45 properties here in Brissie seemed to have be acrued ok with the boring old offset linked to the IP loan.
But maybe at 43 i am old fashioned.
Richard Taylor | Australia's leading private lender
hehehe .. as you said .. to each their own
mixedup wrote:thanks Terry – this is all making senseWhat have you/others found is better to do re the question of whether you have:
(a) one sub-account for all of your IPs (i.e. all rents, all expenses come to/from this one sub-account) versus
(b) one sub-account per property (i.e. for rent and expenses)
(c) some other arrangement: perhaps all rent into one sub-account, all expenses into another for all properties?Any advice from those who have experience?
Seems to me like option (b) may be nice, however from a tax perspective item (a) should be fine no? i.e. in one's tax return everything gets bundled up into one overall loss/profit for all your IPs? Or is there something I'm missing for which a tax agent would really benefit if you used a sub-account per property?
Thanks again
Depends on whether you are treating the properties as a "pooled" portfolio or whether you want to track the individual performance of each property. Option 2 should reduce your accountant fees as they have to break up the costs between the properties – make sure you don't pay expenses from the wrong account. This way if the ATO audits you can easily prove expenses are appropriate for each property and you haven't sunk any in that aren't really there to be claimed.
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