Is it true that you need to have offset account associated with investment property for tax benefits. I was told you can't claim interest as deduction if it is linked to redraw account.
If that is case, only reason to have redraw account is if this is your primary dwelling and you don't intend convert it into investment property?
Yes ofcourse. But curious to get answer from the community as I am sure there are lots of experienced property investors on ozbargain.
Let’s simplify this.
It’s the Net interest your paid for negative gearing.
Got further questions, goto first comment.
ok
Just few mins ago there is thread discussing this.
Find it.
Or google it
Thanks a lot. Appreciate the effort to find me the link.
This is a little nuanced. If you want to claim a deduction for interest on an investment, then the money must have been spent on an approved investment. Imagine a simple example where you borrow $500,000 for a investment property. Interest on this is all deductible. Now imagine you had a spare $100,000 lying around so put into your mortgage account so you now only owe $400K, and pay interest on the lower amount. So far all good. If however, you then redraw that $100K and DON'T spend it on an investment (say you buy yourself a new car), then interest on the last $100K is not deductible (only the $400K that was spent on the investment). Compare this to an offset account. If you park $100K in the offset, this effectively reduces the interest charged, but hasn't actually reduced the mortgage amount for tax purposes. If you want flexibility and to park excess cash to reduce interest on an investment, an offset is a better option than redraw. If your loan is non investment related, redraw is sometimes better as the fees are lower.
This is the right answer.
But then ATO isn't going to audit you over a few thousand in interest whether it is in offset or redraw. My experience is most tax fraud is uncovered when ATO starts opening up an inquiry into something else and starts going through your documents.
If you place money into your mortgage account and that account has 'redraw' facilities, then technically you've paid off that mortgage by the deposited amount.
Eg. if mortgage is $100k and you deposit a spare $10k with intention to use it like an offset, then the tax deductible amount of interest you can claim is against the remaining $90k balance, not the $100k even if you redraw that $10k.
An offset freely allows you to move that spare $10k in and out, and the interest deduction is calculated against whatever the mortgage balance is at the time.
Your question doesn't make sense.
Redraw means you can increase your mortgage and/or take back some payments already made on your mortgage- with the banks permission. There is only 1 account
Offset means you put money in a separate linked account, and you can withdraw it whenever you like - without permission.
In both cases the more you put in the less your loan size - less interest, less tax deduction
Offset and redraw are different types of tools. Unfortunately some lending facilities charge you more for an offset linked loan account. CJbowdens comment is correct. Just use an offset facility with your investment loan.
redraw accounts give no advantage over offset imho, and just hamper your ability to reuse the money, so like others said just use offset, and wear the miniscule fee.
To me, the simple answer is neither an offset nor redraw is good for an investment property regarding tax deduction purpose.
Reducing your interest payment does not do you any good for tax deduction.
But of course, depending on your situation, everyone is different. Best to discuss with your accountant.
You need an accountant