Differences between an offset account and redraw account?

The use of offset accounts has important differences from using a redraw facility which people often overlook.

Unlike an offset, a redraw is treated as ‘new borrowings’ when the funds are drawn out.  This is because a redraw is not considered ‘separate’ like an offset account is.

This is an important distinction to be aware of, mainly for taxation purposes.

Redrawing funds in and out of loans loses ‘traceability’ of what the loan is used for.  It therefore may be hard to claim deductions over time, as the nature of the loan has changed.

However, if you chose to take this money from the offset there would be no change to the nature of your loan as the accounts are unrelated – the interest would just no longer be offset.

As a general concept, when property investors have the choice of using an offset feature vs a redraw facility, it would usually make sense to use the offset.  It does not make sense from a taxation perspective to use the redraw account to transact for everyday banking needs.

A redraw facility is usually available with most loans.  An offset feature usually comes at a price (higher fees, higher rates, etc).

Where is a redraw useful?

You can use the redraw account if you are looking to change the nature of the borrowings.  This is useful if you want to ‘debt recycle’, and churn your owner occupier debt into investment debt.

As an example, if you:

• Have an owner occupier debt
• Plan on purchasing an investment property or any other investment
• Plan on using your cash

Instead of using your cash to provide the deposit to purchase the property, you can pay the cash into your owner occupier debt.  This will sit in the ‘redraw facility’.  You can then redraw the funds back out.  This will be treated as ‘new borrowings’ by the taxperson.  If the purpose of these new borrowings is for investment purposes, you may be able to claim tax deductions here.  It is also important to split the owner occupier loan, so you can account for the portion that is being used for investment and the remaining owner occupier portion.

Note; you should seek specific accounting advice before implementing the above.  The above is a strategy commonly taught by accountants and solicitors, but should be investigated separately to this finance book.

OFFSET ACCOUNT