property & finance
Is Your Investment Loan Tax Efficient? By Theo Krinos
Maximising tax deductions on an investment property loan is one of the key considerations for property investors. Through a combination of the right advice and smart money management, investors can significantly reduce their annual tax bill and save thousands of dollars over the term of a loan. A key part of this strategy for most investors is the negative gearing of assets, in other words, when the cost of owning a property exceeds the income it produces, leading to a tax rebate at the end of the financial year. Although a widely used strategy, we regularly see property investors either failing to maximise tax deductions or muddying the waters with the Australian Taxation Office (ATO) over areas such as using redraw facilities on investment loans. For investors with surplus funds, it’s always wise to pay down the loan on the principal place of residence before reducing the loan on an investment property. Quite simply, tax relief is not available on a home, whereas it is on an investment. Therefore, it makes far more sense to firstly pay off debt that has no taxable benefit. For investors who have surplus funds but perhaps have already paid off the home loan,
simply parking that cash into an investment loan can be fraught with difficulty, particularly if they plan to use the redraw facilities on the account at a later date. Whilst reducing interest paid is fundamentally a good strategy, if these funds are required down the track for a car or holiday, this then causes potential confusion over what part of the interest for that loan is now tax deductible. Although the original purpose of the loan was for investment purposes, the investor has now well and truly muddied the waters with the ATO. A far better idea is to use an offset account, which is considered separate from a home loan account. Additional payments can be made in this account and withdrawn when necessary without risking the wrath of the ATO. Ultimately, putting funds into an offset account has exactly the same effect as paying funds directly into an investment loan to reduce interest but keeps it clean from a taxation perspective. Theo Krinos is Finance Manager at The Mortgage Gallery, Bunbury. Located at 32 Stirling Street, he can be contacted on 9791 4177 or email theokrinos@themortgagegallery.com.au 38