We are often asked the question as Tax advisers about the use of loan offset accounts and negative gearing. This week a client asked us why can we not put additional money into our investment loan and redraw it when we need it? It is important to state from the outset that mixing private and investment borrowings can add complications for tax. By putting money into your loan for a redraw of private use later on, via an offset or redraw account for an investment property, can lead to the reducing your interest tax claim on your investment loan, if not done correctly!
Below we have set out what the use of an Offset account versus Redraw accounts and the tax differences.
- Additional payments into loan’s redraw account reduces the principal loan balance and the interest charged from the day the money is deposited into the loan
- The money can be redrawn if the Bank agrees to, but often there may be restrictions on the amount and timing and also Bank Fees.
- If you redraw money from your separate investment loan for private use, the interest on that amount will no longer be tax deductible, and this means that interest expense moving forward will need to be apportioned between tax vs private ! Warning here
- Additional payments into your offset account reduces the interest bearing balance, and interest is calculated on the net balance of your loan and offset account
- Flexibility to redraw the balance of the redraw amount
- Loan amounts withdrawn from an investment loan offset account for non-investment purposes should not affect the tax deductibility on the overall interest expense claim but might impact whether your property remains a positively or negatively geared property which will impact your tax, tax planning and your overall wealth strategy.
The advice we give here is of a general nature, and you should seek specific professional advice for your circumstances.
We welcome you to contact us and discuss how your strategy will impact on your loan.