Tax Implications of Offset and Redraw Accounts

Redraw facilities and offset accounts are both part of home loan packages that directly link your personal savings to your home loan. However, these two accounts differ, with each offering separate benefits that appeal to various types of consumers...

A 100 per cent offset account is a deposit product linked to a mortgage, and the balance in this deposit account will earn the same amount of interest as your home loan; effectively offsetting the interest charged on your loan.

A redraw facility is designed for the individual to pay their personal savings into a loan, displaying the excess funds as available to withdraw in the future.
Both accounts reduce your loan amount, the key difference being that within a redraw facility you’re technically paying into the loan, whereas an offset account is treated as a transaction account that offsets the total loan amount.

Owner Occupied

To an owner-occupier, the most important part of a package is a strong variable rate mortgage and low fees. The loan should still offer a certain degree of flexibility but must remain an affordable loan.
For an owner-occupier the differences between the offset account and redraw facilities aren’t severe, as both effectively provide the same outcome of reducing the balance accruing interest.

Property Investor

Borrowing to invest in multiple properties can mean this borrower has a slightly different package banking wish list. Loan flexibility is generally most important.

Another important factor for a property investor to consider is the tax implications of each product, meaning that the tax deductibility of excess cash deposited to the loan could become an issue on the redraw facility.
For a property investor using a redraw facility the money deposited into the loan is no longer classified as the investor’s money; it’s simply excess funds that can be withdrawn in a loan format. Therefore if the investor were to withdraw the excess money deposited, they wouldn’t be able to claim the interest on this money as a tax deduction.

In contrast, the money a property investor deposits into their offset account will offset the interest accrued on the loan but will still be considered the investor’s money. This means the investor were to withdraw this money, he or she would still be able to claim the interest on the loan and the withdrawn money as tax deductions.

The importance of the loan structure in relation to tax and the way the money flows in the portfolio is too often understated in the media in favour of just ‘the best rate’ and attracting a ‘sale’ – the banks are the first culprits!

As a property investor you may want to beware focusing solely on rates as a poor structure can have negative tax related consequences for the long term and these are impossible to reverse.. costing you tax deductions and money for ever forward.