Tax Tip 10: Offset in the name of the lower income earner

Discussion in 'Accounting & Tax' started by Terry_w, 5th Aug, 2015.

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  1. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Offset in the name of the lower income earner


    Once you have paid off your main residence you will probably want an offset account on one of your investment properties. This will be useful to store cash from rents and wages and also to save up a buffer for emergencies.


    Where you have used the strategy of buying properties in sole names, some in the name of Spouse A and some in Spouse B, you can move money around to save tax. You would want the cash in the name of the lower income earner as this spouse would generally be the one paying the least tax. Where there are several lenders involved (with that spouse) you would choose the lender with the highest rate.


    Money in an offset means less interest is incurred which means more income from the property.


    Keep in mind the legal consequences of ownership in different names too:

    • asset protection

    • estate planning on death

    • effect on spousal loan strategies

    Perhaps a private loan agreement, even at nil%, can assist in legal planning.


    This is also another reason to consider purchasing in sole names.
     
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  2. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    I think this is a strategy being under utilised by many. I often see clients where the properties have been purchased in the higher income earners name for tax and the other spouse owns nothing so the cash has no place to be stored other than in the offset account of the higher income earner.
     
  3. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    It may also be beneficial to NOT use an offset. Offsets arent always a great idea.

    ie Husband is a high income earner and wife does not work. If they accumulate savings in a interest bearing ING account at 2.5% in the wife's name that would be tax free income and allow husbands neg gearing to be maximised. If an offset was used his interest deduction would be reduced

    But if they had a non-deductible PPOR debt that would be better again and allow them to pay less interest on their home AND max the neg gearing
     
    Last edited: 18th Aug, 2017
  4. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Example

    Homer is on the top marginal tax rate and his wife Marg has a taxable income of $0. They each own 2 rental properties. They have just paid off their home and old man Simpson has died and left them with $200,000 cash.

    Where should they put it?

    The answer, from a tax perspective, would be in an offset account attached to Marg’s loans.

    Loan A is at 5% pa and Loan B at 5.5% pa. Both have offset accounts.

    In this situation if $200,000 is deposited in:

    Loan A the savings would be $10,000 per year. Marg would pay no tax on this

    Loan B, the savings would be $11,000 per year. Marg would pay no tax on this.

    There would no extra tax to pay as Marg’s income is $0 before this, and after depositing her income would be either $10,000 or $11,000 both of which are under the tax free threshold.

    Let’s say Homer had 2 loans with each at 6% pa. If the $200,000 was deposited into either of Homer’s offset accounts the interest savings would be

    $12,000 per year.

    But as Homer’s interest decreases by $12,000 his income increases by this amount and because he is on the 47% tax rate 47% or $5,640 would be lost in extra tax.



    Thus after considering tax the funds would be better placed into the offset account on Loan B belonging to Marg.
     
  5. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Depending on their ages there also may be merits of investing the offset funds so that the non income producing spouse produces 100% tax free income rather than using a offset which reduces deductions for property owners.

    There could also be merits of considering additional super contribution by the higher income earner each year through to retirement and allowing the lower income earner to hold the cash in super - For now obtaining refundable tax credits. And perhaps accessing tax free growth.

    Many strategies are available. Anyone who inherits $200K should consider licensed financial advice before running off and accessing a offset. Brokers shouldn't be recommending a offset to address such a case as the advice can be financial advice not credit advice.
     
    Last edited: 26th Mar, 2018
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  6. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    An offset account is not a financial product, I believe, but a credit product. Happy to be proved wrong though.
     
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  7. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    ASIC consider it can be a credit product in its simplest form ie establishment of a new offset and loan facility. A decision to place cash into a offset is financial advice as all alternatives are also available. An AFSL is required.

    03-388 ASIC grants relief in relation to mortgage offset accounts | ASIC - Australian Securities and Investments Commission

    The above class order provides a limited exception for mortgage brokers when establishing a loan and offset. It doesnt cover a matter of placing $X into a offset
     
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  8. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    That press release is 15 years old now, prior to the NCCP Act too.
     
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  9. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Yep but the financial product view hasnt changed. More recent instrument which excludes AFSLs from credit laws ASIC Corporations (Mortgage Offset Accounts) Instrument 2017/795 which covers s911A(1) Corporations Act 2001.. It broadens the issue of disposal and acquisition of a financial product v's a new facility which does not. One deals with the balance, the other with the account.

    Most people also dont realise that a statement such as "You should open an account with ING" is financial advice.

    We encountered this as we have a AFSL and have added mortgage services. We need to ensure AFSL redress if there is a cash balance in offset v's a new facility.

    Its not unlike the SMSF loan issue for accountants. They must hold a AFSL to discuss SMSF loans since it relates to acquisition of a financial product despite it being credit product in appearance. The financial product is the SMSF acquisition of the property using the loan. The credit product is the loan.
     
    Last edited: 26th Mar, 2018
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  10. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    I see people who still are getting this wrong. They might be offsetting the loan with the highest interest rate, but have a spouse who debt recycled into shares who has a lower income. It can be worthwhile offsetting their loan even though it may have an lower owner occ interest rate.
    This is because the after tax benefits might be greater than the interest saved and extra tax paid by offsetting the higher interest rate loan that has been used by the spouse on the higher income.
     
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  11. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    I am often asked some complex issues surrounding offsets

    1. IF A & B have a loint loan (form a joint property) can ONE of them have a offset and not the other ?
    No. Not usually. A offset consistent with the ATO views will reduce the interest charged on the loan. So it affect all borrowers on that loan to reduce the total PROPERTY interest deductions. There can be a exception when EACCH BORROWER seperately borrows.

    2. IF A & B each sperately borrow how does this work ? Its complex and must be arranged when the property is being acquired. It cant later be easily refinanced etc. Imagine this as an example. David has $400K saved from a inheritance. He has a low income. His wife Mary is a medical specialast on high income. It may be wise for Mary to borrow and NOT david. He adds cash. Then Mary can offet her portion without impacting David.

    3. Can I offset two loans ? Not really. The ATO Ruling 93/6 does consider it acceptable but in practice lenders dont do this. However two loans can each have a offset. Be wary of offsetting two loans partially. Loans that have offsets may be a higher rate.

    4. When I have a offset can I offset MORE than the loan balance ? Technically. No. Any surplus doesnt produce a benefit. It is effeicient to match the offset so it is the same as the loan and then consider another offset

    5. Can I offset a loan with one bank with a offset account of another lender ? No. Tax Ruling TR 93/6 Para 23 says its not acceptable. This is because the offset entity and the lender entity are different taxpayers and it poses a concern.

    6. What is the best loan to offset ? Generally speaking consider the following.
    a. The taxpayers who will be impacted by the reduced deductibility due to the offset. Do they have different marginal tax rates ?
    b. Is the loan a deductible loan ? It is always wise to offset non-deductible debt first.

    7. Can I move a offset as circumstances change ? YES. Thats one of its key benefits. If you deposit savings into a loan it discharges the loan down. A offset doesnt.

    8. If I refinance and find I have the wrong loan offset can I fix it. YES. However, does the new lender allow offsets and what does it cost ?

    9. Can my parents give me savings to offset my loan ? Yes. However if you propose to pay them interest seek tax advice. It may be non-deductible to the payer and also assessable to the parents. There is no such thing as a private loan arrangement if it pays interest. It is still assessable income for the lender. If they are non-resident there is a withholding tax liability the payer could be liable for as well.

    10. Can a parent give me money so they can access a pension ? Yes. However the parents may be gifting and this would affect their pension. Pensions etc cant deprive themselves of assets to get a pension. Centrelink would count the gift as if it was still a asset for a period of time
     
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  12. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Yes a fair few lenders offer multiple offset accounts on the one loan split.

    An offset account is merely a savings account which is linked to a loan and it can have any amount of money in it, but there would be no benefit if the amount in the offset exceeds the loan linked to the offset.