As we are all aware the RBA increased their cash rate for the 5th month in a row during September 2022. With the hike in inflation and interest rates, Australians are certainly feeling the pinch whether it be for their investments or day to day cost of living.
Foremost on most minds is what options are available to alleviate the pain. Whether it be to free up cash, re-invest or shop around for a better rate, many people will be considering re-financing their current loan arrangements. Ensuring that you maintain the tax deductibility of any facilities is an important aspect to take into consideration.
We have highlighted below a couple of potential options to access funds including comments on the tax consideration –
Offset account – How does it work?
Many people currently use and may turn to an offset account. An offset account is a separate transaction account linked to your loan facility. The more funds in your offset account, the lower the interest paid on your mortgage.
The deductibility of the loan interest is determined by the initial borrowing purpose. Should the funds be used for income producing purposes, the interest will remain deductible.
The withdrawal of funds from the offset account has no impact on the loan facility it’s attached to.
Using a re-draw facility
A re-draw facility works slightly different to an offset account. Account holders can draw funds on any payments made above the minimum and agreed minimum repayments. These funds are essentially held as a “savings account.”
Unlike the offset account, the funds re-drawn from the facility MUST also be used for income producing purpose for the interest to be tax deductible. Where that is NOT the case, an apportionment calculation will need to be made at year end.
Merging various facilities into one
The least preferred option for accountants but it does simplify your affairs and is a common approach by brokers and banks. It’s important that extreme care is taken with your record keeping in determining from the outset the deductibile proportion. Likewise, the source of subsequent repayments and redraws need to be tracked and categorised correctly.
Should you wish to discuss the above or any other matter, please get in touch the Connolly & Associates team here.