OFFSET LOAN AND TAX DEDUCTIBILITY
Q: The minimum monthly mortgage repayment on my investment property is $1,206 and income from the tenants is $1,482. I have been making further contributions to the mortgage, and now have a redraw of $17,000.
Is it best for me to open an offset account to take advantage of any tax deductions on the interest I am paying? Am I able to withdraw the $17k without impacting my tax return? What other advice can you offer so that I can maximise my tax returnand take advantage of my investment property? I look forward to hearing
A: From my broker colleagues I understand that an offset account is a deposit facility tied to the loan advanced to purchase an IP. The bank calculates the interest on the balance of both facilities netting the deposit against the loan and calculating the interest on the balance.
The essential issue regarding deductibility of interest is how the loan funds are applied. Where they are used to fund the acquisition of an income producing asset such as a rental property, then the interest will be deductible.
What happens when the repaid amount is to be redrawn? If the redrawn amount is used to acquire an income producing asset or paying for items relating to an income producing asset, eg council or water rates of the investment property, or acquire a new investment property, then the interest will be deductible.
By contrast, if it was used to acquire a private vehicle or
go on holiday, then the interest will not be deductible.
Consider the case where an investor faced problems during the GFC. They borrowed from family, repaying the bank. On restructuring, they used bank funds to repay the family. The court held that the interest on that component is not deductible as the payment to the family is of a private nature – notwithstanding the investor’s argument that they were simply trying to reinstate the previous position.
The conclusion I draw from this is that once a loan is drawn down for funding a rental property, it should not be reduced. The surplus funds should be deposited into an offset account tied to the loan. This will keep interest expenses low. But importantly, should the funds be withdrawn from the offset account for a private purpose then the increased interest will be deductible – as the original loan has not changed.
Similar situations arise for people who had loans taken out a long time ago to fund their main residence. Before the offset facilities were made available they simply reduced their loans. They face a problem obtaining a tax deduction for interest expenses on a new loan to fund a move to a new home while keeping the old as a rental – even though the old home may be used as security.
– Shukri Barbara
BUYING A PROPERTY AS FOREIGN NATIONAL WITH PERMANENT RESIDENCY VISA
Q: I am looking at investing in an apartment in Sydney. I am French and have a permanent resident visa. I should get my Australian citizenship within the next three months.
If I have to move indefinitely overseas in two years, I would like to understand the consequences regarding any property investments (e.g. taxes, management of the apartment).
Could you please come back to me with some information?
A: If you purchase an apartment in Sydney and live in it as your principal place of residence, there will be no taxation consequences or obligations for your period of occupancy.
However, if you leave Australia to live overseas which will therefore mean that you will convert your Sydney property into an investment property, you will be earning rental income from your tenant (which will be assessable income and therefore taxable) but you can also claim the associated property expenses such as council rates, depreciation, water rates, interest expense on the loan, real estate agent fees, repairs etc. Because you have an Australian investment property earning you an income, you will still be required to lodge an Australian tax return every year (even if you are an Australian non-resident). As an Australian non-resident, any taxable profit you derive from your investment property, you will be required to pay income tax and if you have any taxable losses from your investment property then these tax losses will accumulate and roll over on a yearly basis. You will also be unable to offset these tax losses against your overseas income. However, if there are future Australian investment profits then you will be able to offset these against your carried forward Australian tax losses.
If you subsequently sell the property after a period of earning rental income, you may also be liable to pay capital gains tax and as a non-resident of Australia you will also be ineligible to claim the 50% capital gains tax discount concessions.
Alternatively, you can preserve the capital gains tax-free status of your Sydney property by renting it out for less than six years and provided that you move back into the Sydney property before the six years expires and you have not nominated any other dwelling as your main residence, then you will not pay capital gains tax if you sell.
– Angelo Panagopoulos
This feature is from the September issue of Your Investment Property Magazine. Download the issue to read more.
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