Tax Considerations for Offset Accounts and Redraw Facilities
When taking out a loan to purchase a home, the interest on the loan is not tax-deductible if the property is owner-occupied. To minimise non-deductible debt, it is often recommended that borrowers aim to pay off their home loans as quickly as possible. Two popular strategies involve using either an offset account or a redraw facility, both of which can help reduce interest expenses. However, these options can have different implications for tax planning.
This guide explores the key tax considerations of offset accounts versus redraw facilities, helping you make informed decisions that align with your financial goals. While Centrelink implications are not covered in this article, it is important to note that offset accounts are generally treated as financial investments and subject to asset testing and deeming rules. Additionally, not all lenders offer these facilities, so it is essential to check their availability and cost-effectiveness.
When is Loan Interest Tax Deductible
Under the Income Tax Assessment Act 1997, interest expenses are deductible if the borrowed funds are used to purchase income-generating assets, such as investment property or shares. Conversely, interest on loans for personal use, such as a family home or a private car, is not tax deductible. Nondeductible loans can become deductible if the asset originally purchased with the loan starts generating assessable income. For example, the interest on a home loan becomes deductible if the property is converted into an investment property.
Offset Accounts vs Redraw Facilities
Offset Accounts
An offset account is a savings account linked to your home loan. The balance in the offset account reduces the interest charged on the loan but does not reduce the loan principal.
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Tax Deductibility: The balance in an offset account does not affect the tax deductibility of the loan. Interest deductibility depends solely on how the borrowed funds are used.
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Interest Income: Offset accounts do not earn interest, so there is no interest income to report in your tax return.
Redraw Facilities
A redraw facility allows borrowers to access extra repayments made on their loans. The tax implications depend on how the redrawn funds are used.
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If redrawn funds are used to purchase income-generating assets, the interest on this new borrowing can be tax deductible.
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If used for personal purposes, the interest on the redrawn funds remains nondeductible.
Practical Scenarios
Scenario: Offset Account
Kate and Nigel have a 1 million home loan and have $50,000 in their offset account. They decide to withdraw $50,000 to invest in an income-generating portfolio. While this increases the interest on their home loan, the additional interest remains nondeductible because the original loan was for personal use.
Scenario: Redraw Facility
If Kate and Nigel accessed $50,000 from a redraw facility instead, the tax deductibility of the interest would depend on how the funds were used. If they invested the funds in income-generating assets, the interest on this new borrowing would be deductible.
Choosing the Right Option
When managing offset accounts and redrawing facilities, it's essential to consider both your short-term cash flow needs and long-term tax strategy. While offset accounts can provide greater flexibility, redraw facilities may offer tax benefits if funds are used for income producing purposes.
Let Acton Wealth Help You Navigate the Details
Understanding the tax implications of financial decisions can be complex, but you don't have to navigate them alone. At Acton Wealth, our experienced advisers can guide you in choosing the right strategies for your circumstances. Contact us today to ensure your approach is optimised for your financial future.
Everything You Need to Know About Buying a Home
Thinking about making the move from renting to owning your own home? Before you start the exciting search for your dream property, it’s important to answer key questions—like understanding your mortgage options, knowing your borrowing capacity, and considering the tax implications of your purchase.
For personalised advice that fits your financial situation, get in touch with ActOn Wealth. We are here to help you make the best choices for your future.
