Line of Credit VS Offset account

Hi Jon

Re the LOC – some lenders allow their IO loans to be used like LOCs. The main issue I see is people borrowing money, parking it in a savings account and then investing. This will render the interest non deductible or partially deductible because once the borrowed money hits the savings account and mixes with cash once you use the money you cannot say you are using the borrowed money – some of it will be cash.
Case law for this is Domjan v FCT.

Some banks such as Westpac allow money to be transferred from the loan directly to the recipient. This is great so a LOC is not needed.
Other banks such as ANZ or NAB do not allow this. Money cannot be paid from a loan, other than the LOC. So a borrower would need to set up a clean savings account, transfer the money there, then pay the investment expense from the savings account – and hope the ATO won’t be too strict if audited.

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If you have an offset account on an investment property and a paid off main residence then using the funds in the offset account may be fine as the interest will increase on the loan and this interest would be deductible if the loan solely relates to the investment property. but it would be deductible against this property and not the property it is used for. Normally this won’t change anything, but if there are different entities involved it will – eg. husband owns IP 1 and offset account. Money taken out to purchase IP 2 in wife’s name. Husband will get the deductiion and not the wife.

If you want to use a LOC which is secured against a main residence this is fine. If you use the LOC for private expenses though it will be a mixed loan and this will create apportioning headaches, especially if you take money out and in more than once.