Offset accounts

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Q. I have an investment property and an interest-only investment loan @ 90% loan to value ratio (LVR). An offset account was also created when the loan was created. Am I able to put my own money into the offset account without having any tax implications if I take it back out?
I earn around $100,000 pa and have substantial savings.
 
A. I don’t believe there’ll be any tax implications for you if you deposit funds into the 100% offset account and then later withdraw those funds for personal purposes.
 
In essence, the 100% offset account is a deposit account, not a loan. By depositing funds into the offset account you aren’t making an additional repayment to reduce your loan but rather depositing funds into a ‘savings’ account. Drawing funds from the offset account is no different to a withdrawal from any of your savings accounts. These funds are yours, they aren’t borrowed; there’s no negative gearing or other tax implications you need to consider in relation to the use of your savings.
 
By way of an example, say your loan structure is as follows:
Loan account: $200,000 @ 9.20% pa interest-only
Interest payable by you = $18,400 pa
Offset account: $25,000 @ 9.20% pa
Interest payable by you = $175,000 @
9.20% pa interest-only = $16,000 pa
This effectively reduces your monthly instalment by $200 and is the equivalent of an 8% pa interest rate on your investment loan.
 
Should you subsequently withdraw the $25,000 from your offset deposit account, then the interest on your investment loan will revert to $18,400 pa.
 
In the event that you deposited $25,000 in the offset account for a full financial tax year, then the tax deductible interest on your loan would be $16,000.

While there’s a nominal reduction in the negative gearing benefits as a result, in my view the 100% offset structure is still a better option because it improves your cash flow, and provides a much higher rate of return than you would otherwise receive on a standard short-term fixed/variable interest deposit account.

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