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Parking Borrowed Money in an Offset Account

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At first glance, it might seem smart to borrow money and temporarily park it in your offset account until you're ready to invest. But did you know this move could cost you thousands in lost tax deductions?

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This is one of the most common misunderstandings we come across—and it’s one we want to help you avoid.

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What’s the Strategy?

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Let’s say you take out a loan to invest in property or shares, but instead of using the funds immediately, you place the borrowed money into your offset account (or even a regular savings account) until you’re ready to invest.

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Makes sense, right? You’re saving interest while you wait to deploy funds.

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However—this can create a serious tax problem.

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Why the ATO Might Deny Your Deduction

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The ATO only allows interest deductions on borrowings that are directly linked to income-producing investments (under section 8-1 of the ITAA97).

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When you park borrowed funds in an offset or savings account—especially one that contains your own personal savings—it becomes very difficult to trace whether the investment was funded from the borrowed money or from your own. The link between the loan and the investment gets blurred.

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In tax law, this is called "breaking the nexus"—and once it’s broken, your interest deduction may be denied.

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Real Example: Domjan Case

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In a well-known case (Domjan v Commissioner of Taxation, 2004), a taxpayer deposited borrowed money into a savings account that already had her own funds. She later used that account to pay for an investment expense.

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The result? The court ruled the interest was not deductible, as it couldn’t be proven that the borrowed money—rather than her own—was used for the investment.

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What About Offset Accounts?

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Offset accounts are slightly different—but just as risky.

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Since money in an offset reduces the interest payable on a loan, if your borrowed funds sit in the offset, no interest is actually incurred yet. Once you withdraw the funds to invest, interest starts accruing again.

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The key issue is whether the borrowed money is cleanly traceable to the investment.

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• If the offset contains only borrowed funds that are later used to invest – interest might be deductible.
  
  
• If the offset contains a mix of borrowed and personal money – the waters are muddied. Deductibility could be lost, or only partially allowed.
  
  

To make matters worse, if you accidentally deposit personal funds into the offset account that held borrowed money, you can't fix it. It's like trying to remove a drop of ink from a glass of water.

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Safer Alternatives

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To avoid this mess, consider one of the following:

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1. Interest-Only Loan with Direct Drawdown

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Draw the loan funds directly at settlement for your investment. If not ready, pay the funds back into the loan to keep them clean. Reborrow later when you invest.

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2. Line of Credit (LOC) Facility

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Use a LOC to draw only what you need, when you need it. Since you’re not moving funds in and out of offset accounts, tracing is easier. However, LOCs often come with:

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• Higher interest rates
  
  
• No fixed term (can be recalled by the bank)
  
  

Once you’ve used the LOC, you may convert it into a term loan for stability.

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Key Takeaways

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• Parking borrowed funds in offset or savings accounts may destroy your ability to claim interest deductions.
  
  
• Mixing personal and borrowed funds in any account can permanently contaminate the loan.
  
  
• Proper structuring at the start can save you a lot of tax headaches down the track.
  
  

Need Help Structuring Your Investment Loans?

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We’ve helped many clients set up tax-efficient loan structures from day one—so they never have to worry about whether the ATO will deny their deductions.

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Contact us if you're planning to invest and want to make sure your finance strategy holds up under scrutiny.