Hi,
This might be a question for an accountant but would like to hear your thoughts.
I am currently renting and i have an IP which i am making IO repayments on.
I have been building up some savings in a high interest savings account and would like to know if i am better off tax wise keeping my money in the savings account or transferring the money into the off set account?FYI – The home loan interest rate is 6.70% and the savings account is currently 6% but will drop to 5% in 1 month.
Cheers,
ShaneInterest earned from your savings is taxed, whereas interest saved from your loan is not
For instance if you have $100,000 savings@6% interest p.a., and are at the marginal tax rate of 30%, then you would earn $6,000 per year, but then be taxed on $1,800 and be left with $4,200
On the other hand, if you were to place that money in the offset account @ 6.7%, you would save +$6,700 p.a. and this would not be taxed, so you would be better off by $2,500 per year (minus the costs associated with an offset account)
Hi Kong,
That does make sense to me. At the moment my IP is negatively geared so using your example above would that change your calculations?
Even though I would be getting taxed on the interest earnt wouldn’t I also get a higher tax refund from the interest charged on my loan as it would be reducing my taxable income?
Unless you rely on the interest from the savings place the funds in your offset account.
The interest you receive will need to be added to your Taxable income and will not aid your negative gearing position.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
Yes.
If the IP was negatively geared that would change the calculations and could mean that you would be better off having your money in a savings account in order to claim more from the interest associated with your IP loan.
It all depends on the inputs.
Particularly your marginal tax rate, and how much you are negative gearing by.
Generally Offset accounts work quite well with PPR loans, but with IP loans it depends on your circumstances.
kong71286 wrote:Interest earned from your savings is taxed, whereas interest saved from your loan is notFor instance if you have $100,000 savings@6% interest p.a., and are at the marginal tax rate of 30%, then you would earn $6,000 per year, but then be taxed on $1,800 and be left with $4,200
On the other hand, if you were to place that money in the offset account @ 6.7%, you would save +$6,700 p.a. and this would not be taxed, so you would be better off by $2,500 per year (minus the costs associated with an offset account)
Kong, this is an offset linked to an IP. So any reduction in the interest payable on the IP loan would lead to more income. This means the negative gearing effect will be less, or the positive income more. This in turn equals more tax.
However, it still may work out better to put into the offset account.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Thanks for your feedback.
I was thinking the off-set account would be best.
Cheers,
Shane.For an IP the answer will always be your offset account because of the fact that your loan has a higher interest rate.
For PPOR definitely the offset account for obvious reasons.
Terryw wrote:Kong, this is an offset linked to an IP. So any reduction in the interest payable on the IP loan would lead to more income. This means the negative gearing effect will be less, or the positive income more. This in turn equals more tax.However, it still may work out better to put into the offset account.
His calculation for putting the money into the savings account is wrong because he forgot to add back the benefit from negative gearing.
$100,000 savings@6% interest p.a., and are at the marginal tax rate of 30%, then you would earn $6,000 per year, but then be taxed on $1,800 and be left with $4,200
Adding Negative Gearing Benefit, $6700 * 30% = $2010.
So Savings account option = $4,200 + $2,010 = $6,210.
So its $6,700 (Money in offset) vs $6,210 (Money in Savings).
The difference is however all to do with the difference in interest rates.
As already mentioned, the offset option wins hands down every time. And unless your property is almost geared neutral, or you have an obscene amount of cash to offset, you'll still get tax/gearing benefits………………..and as I always say, is paying tax a bad thing? Must mean you're actually making money
Cheers
Yes, you guys are right.
After doing some proper calculations, I've come to the same conclusion:
"Placing money in a Offset account wins hands down in all scenarios where interest from the loan is greater than that from interest"
You must be logged in to reply to this topic. If you don't have an account, you can register here.
