Tax rules on leaving savings in a redraw account

Hi

This is why an offset account is sometimes a better setup than a redraw facility.

John

Not necessarily Luke

What if you had a $100,000 home loan paid down to $50,000 with $50,000 in the offset account. Net interest = $0

Now you want to invest $50,000 in an investment. You have 2 choices:
1) take $50,000 cash from the offset, or
2) take $50,000 as borrowings from the redraw.

Which would you choose?

I would chose to borrow the money, ie option 2.

If you chose option 1, then the interest on the home loan would go up (ie the loan balance would be $50,000 and nothing in the offset). This interest will not be deductible.

If you chose option 2, then the interest on the home loan would be the same as Nil. But the interest on the $50,000 portion borrowed to invest would be deductible.

The net result is that the overall interest is the same, but the deductions have been increased (by approx $3,500 in this eg – possibly a saving of $1000+ per year).

Of course, it would be better to set up another split on the home loan to keep the private and investment portions totally separate.

Yes, until it is needed it should be kept in an offset account saving you non-deductible interest.

I guess the main point is not to use offset funds for investments directly. (unless you have no non deductible debt)>

Money in an offset account is cash.

So if you use it to pay for new PPOR then this can be good as it results in a lower non deductible loan.

However, if you use cash to pay for an investment then this is not so good if you have non deductible debt. You will end up paying more interest for non deductible debt and less interest on deductible debt = more tax payable.

Yes it would be better to borrow funds for the investment.

eg. Imagine you had a $1,000,000 home loan with $200,000 in the offset. This means you pay interest on $800,000.

If you took the $200,000 and used it for investment then you would now be paying interest on $1,000,000.
None of the interest would be deductible.

Instead, if you set up a LOC on your home for $200,000 then you would be able to borrow the $200,000 to invest. Your home loan would still be $1,000,000 and you would still have $200,000 in the offset. So you would be paying interest on $800,000 which wouldn't be deductible.

Net result is still interest is being paid on $1,000,000 but 20% of it would be deductible.

If you don't have enough equity in the home then it would be worth taking the $200,000 from the offset and paying it off the homeloan and then setting up a separate loan and reborrow it again. A bit of mucking around, but it would save you a fortune in tax over the years.