Redraw vs Offset Accounts: Understanding the Tax Implications
When choosing a home loan, understanding the difference between a redraw facility and an offset account is crucial. While both allow you to reduce the interest on your loan, they function differently, and this distinction can have significant tax implications—particularly if you ever convert your home into an investment property.
What Is a Redraw Facility?
A redraw facility allows you to access extra repayments you’ve made on your loan. For instance, if you’ve paid more than your minimum repayment, you can redraw these funds when needed. This can be appealing for those who want to reduce their interest while maintaining some financial flexibility.
However, there’s a catch: redrawing money from your loan changes the purpose of the funds in the eyes of the Australian Taxation Office (ATO). This change can impact the deductibility of interest if the property becomes an investment. The ATO’s purpose test evaluates what the redrawn funds are used for, and if they’re not for investment purposes, the interest on that portion of the loan is no longer tax-deductible.
What Is an Offset Account?
An offset account, on the other hand, is a transaction account linked to your home loan. The balance in this account offsets your loan balance, reducing the amount of interest you’re charged. For example, if you have a $500,000 loan and $50,000 in your offset account, you’ll only be charged interest on $450,000.
Unlike redraw, withdrawing funds from an offset account does not change the loan’s purpose. This makes offset accounts particularly advantageous if there’s any chance you might convert your home into an investment property in the future. The loan retains its original purpose, and the interest remains fully deductible (subject to ATO rules) if the property becomes an investment.
Why Choose Offset Over Redraw?
If you own a home that might one day become an investment, an offset account is typically the better choice. Here’s why:
Tax Advantages: Using an offset account ensures the loan purpose remains unchanged, preserving interest deductibility.
Flexibility: Withdrawing money from an offset account doesn’t affect the tax status of your loan.
Future-Proofing: Even if you’re unsure about converting your home into an investment, an offset account gives you peace of mind.
Key Considerations
Not all loans come with offset accounts, and even fewer offer multiple offset accounts. Multiple offsets can be beneficial if you’re managing funds for different purposes, such as saving for renovations or a holiday. A good mortgage broker will help you navigate these options and choose the right loan structure for your needs.
General Advice Warning
This article provides general information and does not constitute financial or tax advice. For advice tailored to your specific situation, consult a qualified tax professional or financial adviser.
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