When it comes to choosing whether to pay down a loan with a redraw facility as opposed to putting money into an offset account, many people choose the former without realising that this could have adverse tax consequences down the track.
The problem is that when you are working out the deductibility of interest on a loan, it is what the funds were used for that dictates whether the interest incurred on the loan is deductible or not.
For example, if you have a $100,000 investment loan and for some reason pay an extra $10,000 temporarily, then redraw that $10,000 to for a private purchase, only 90% of your loan interest will be deductible. You've effectively re-borrowed $10,000 for private purposes.
The alternative is an offset account that is linked to a loan, which allows the balance in that offset account to be deducted from the loan account when the bank calculates interest on that loan.
In the above example, you would be better putting the $10,000 into an offset account, as you haven't paid anything off the loan. This means you get the benefit of reducing interest costs. If you then spend the $10,000 on something private, the interest costs on the original loan of $100,000 are still fully deductible, as the full investment purpose of the loan is still intact.
There are many variations of this theme that can apply to multiple situations.
If you're thinking about how to restructure your loans to be more tax effective, contact us on 02 9957 4033 or email us to arrange a chat.
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