# Tax implications of using a home loan for investing



## rx2 (2 February 2011)

Hi Guys,

I would really appreciate peoples thoughts and experiences on this. 

I currently have a home loan with an offset account that is in joint names (wife & I). The home loan is p&i. The offset account has some extra $$ that I am thinking of taking out and investing in shares in my wifes name only. I have a few general questions relating to this:

1. For the amount that is taken from the offset account that is invested in income producing shares i.e. dividends are received, can the interest on this be claimed as a tax deduction? 

2. If it can be claimed as a tax deduction can it be claimed solely on her tax return. Investments will be in her name, but the offset account is in a join name.

3. Since the home loan is p&i - I will be making ongoing payments that will be reducing the principal. I assume when calculating the interest on the portion borrowed for tax deduction purposes you would have to take this into consideration?

4. The bank can also offer creating a new interest only loan, in my wife's name only, with the house as security. This would obviously be easiest for taxation purposes, but the interest rate is 0.1% higher than the current home loan.

Thoughts?

Cheers

Rob


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## Gunslinger (2 February 2011)

*Re: Taxation implications using a home loan for investing*

I believe option 4 is your only way to accomplish your aim.
Having said that, an loan for this purpose with only .1% interest above a standard variable home loan rate seems very low so if it's correct I'd strongly consider it.

Speak to the professionals though (accountant) 

Cheers,
JB


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## drsmith (2 February 2011)

*Re: Taxation implications using a home loan for investing*



rx2 said:


> Hi Guys,
> 1. For the amount that is taken from the offset account that is invested in income producing shares i.e. dividends are received, can the interest on this be claimed as a tax deduction?



If you can't find that information on the ATO's website, I'd suggest giving them a call.

I suspect it will depend on whether or not they treat payments into the offset account as repayment of the loan. If not, they might say that the original purpose of the loan was private and interest therefore not deductable.


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## Taltan (3 February 2011)

*Re: Taxation implications using a home loan for investing*

1. Yes
2. Yes
3. Yes
4. If your lucky enough that its only 0.1% do it, otherwise trust me the accounting fees associated with the calculations will cost you more than the extra 0.1% which itself will be tax deductible. The ATO are not particularly fond of people who jumble it either.


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## rx2 (3 February 2011)

*Re: Taxation implications using a home loan for investing*



Taltan said:


> 1. Yes
> 2. Yes
> 3. Yes
> 4. If your lucky enough that its only 0.1% do it, otherwise trust me the accounting fees associated with the calculations will cost you more than the extra 0.1% which itself will be tax deductible. The ATO are not particularly fond of people who jumble it either.




Thanks Taltan, and everyone who has replied. I have just looked up the ATO number and I am about to ring them myself to confirm this. I'll let you know what they say.

Things are a little more complicated though. I have already taken money out of the offset account and bought some shares. This raises a couple of questions:

1. If I do open up a IO account for investing purposes, since I have already purchased shares with the offset account, the tax deduction for interest has to be done against the offset account?

2. I assume the only way of claiming a tax deduction against the new IO loan would be to sell/buy my share portfolio (I am also led to believe this is a bit dodgy, if you buy/sell within a short period of time for taxation gain).

Cheers

Rob


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## rx2 (3 February 2011)

*Re: Taxation implications using a home loan for investing*



rx2 said:


> Thanks Taltan, and everyone who has replied. I have just looked up the ATO number and I am about to ring them myself to confirm this. I'll let you know what they say.
> 
> Things are a little more complicated though. I have already taken money out of the offset account and bought some shares. This raises a couple of questions:
> 
> ...




Just of the phone with the ATO and I can confirm what Taltan said above is true. However, the chap at the ATO said it can be tricky calculating what interest is payable when using an offset account, and if audited you would need to demonstrate how you arrived at the figures. I need to decide now whether to setup a dedicated IO investment account.

On the second issue re: for the shares I have already purchased using the offset account, can I repay that loan and use the new IO investment loan for tax deductions. And the ATO said yes - the chap said all I am doing is refinancing the loan. 

Good outcome all around.


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## Knobby22 (3 February 2011)

*Re: Taxation implications using a home loan for investing*

My bank let's me split my house loan at no cost. (ME bank)

The original loan is almost paid off, the investment part of the loan is at the same interest rate and is presently interest only but soon I will be paying it off.

Check with the bank. They should all be able to do it, though some will charge.

I have never had an ATO problem as they are obviously for seperate purposes.


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## drsmith (5 February 2011)

*Re: Taxation implications using a home loan for investing*



rx2 said:


> Just of the phone with the ATO and I can confirm what Taltan said above is true. However, the chap at the ATO said it can be tricky calculating what interest is payable when using an offset account, and if audited you would need to demonstrate how you arrived at the figures. I need to decide now whether to setup a dedicated IO investment account.



Keep a seperate record of investment transactions from the offset account and apply interest to the outstanding investment amount based on the home loan interest rate. Should this be greater than the total interest paid in any given month, the lesser figure applies. This can be tedious if to do lots of transactions, but it should satisfy the ATO should you be audited.

One thing you can't do is capitalise the interest (add it to the investment borrowings). You must treat the record as paying the interest each month as a minimum.


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## rx2 (5 February 2011)

*Re: Taxation implications using a home loan for investing*



drsmith said:


> Keep a seperate record of investment transactions from the offset account and apply interest to the outstanding investment amount based on the home loan interest rate. Should this be greater than the total interest paid in any given month, the lesser figure applies. This can be tedious if to do lots of transactions, but it should satisfy the ATO should you be audited.
> 
> One thing you can't do is capitalise the interest (add it to the investment borrowings). You must treat the record as paying the interest each month as a minimum.




I don't think its that easy for a couple of reasons - 

1) The home is p&i. So each repayment is taking some of the principle of, hence the principle of the money borrowed from the offset used for investment purposes is reducing. I would have to work out with each home loan repayment what amount of the principle is coming of, just for the investment loan proportion.

2) This is further complicated by the offset account - Since I use the offset account as a transactional account it has a lot of inflows/outflows. Interest on the home loan is calculated daily. So when the end of the month comes the interest payable could vary considerably as the offset account value will go and down over that period. My repayments are fixed, so it will be pretty difficult to calculate what proportion of the repayment is for interest and what is principle. Does that make sense?

Speaking to the guy at the ATO, it can be done, but it is ardous process and you need to demonstrate how you workings if audited. Seems a lot of hassle to me - hence when I am going to pay the extra 0.1% and have a separate LOC account.


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## drsmith (6 February 2011)

*Re: Taxation implications using a home loan for investing*



rx2 said:


> I don't think its that easy for a couple of reasons -
> 
> 1) The home is p&i. So each repayment is taking some of the principle of, hence the principle of the money borrowed from the offset used for investment purposes is reducing. I would have to work out with each home loan repayment what amount of the principle is coming of, just for the investment loan proportion.
> 
> ...




1) Can the principal component of the loan repayments be allocated fully to the private portion of the debt ?

2) Can the non-invesmtent inflows/outflows in/out of the offset account be allocated fully to the private portion of the net debt (loan balance minus offset balance) ? 
If so, that would make the calculations much simpler.

Ideally, it is better to have invesmtents in seperate accounts to private finances. The crtitical factor is time vs cost. Excel spreadsheets make it easy these days although at 0.1% diff it hardly does seem worth it assuming there are no other costs in setting up/running a discrete investment loan structure. 

As you have allready purchased the shares from the offset account, it may be necessary to get answers from the ATO to the above questions in any case.


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## ROE (13 July 2011)

AFR yesterday has an article on offset arrangement and capitalise interest etc..
some of these arrangement considered by ATO as tax avoidance and they have notice

some advisers and brokers offer these type of setup and they stepping up to audit these arrangement...


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## hawamahal (18 July 2011)

Just a quick question on the issue.

I have got a home loan for my Primary Place of Residence and i have got spare money in the offset account. Say i took $50K out of that to buy Shares, I believe that i will be able to get a Tax deduction for $50K on the home loan Interest rate.


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## robusta (18 July 2011)

hawamahal said:


> Just a quick question on the issue.
> 
> I have got a home loan for my Primary Place of Residence and i have got spare money in the offset account. Say i took $50K out of that to buy Shares, I believe that i will be able to get a Tax deduction for $50K on the home loan Interest rate.




I think you need to set up a seperate line of credit to make it easier to work out the interest - that is what I am doing anyway.


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## hawamahal (18 July 2011)

Thanks for the quick reply. 

My loan setup does not allow me to have a separate account, I will have to change the lender in order to do that.

If it is just about calculating interest, it should be fairly easy.  The question is if it legal from ATO's point to view or not.


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