Is this Debt Recycling?

Discussion in 'Share Investing Strategies, Theories & Education' started by Meisterin, 22nd Feb, 2017.

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  1. Meisterin

    Meisterin Well-Known Member

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    Hi Members

    I currently dabble in the sharemarket. I buy shares in $1000 batches. Currently I have $2000 in the share account. But after reading posts regarding debt recycling I am wondering if what I intend to do is debt recycling.

    As I only buy shares when they fall significantly, the $2000 in the share account has been sitting there for 6 months, not earning any interest. However, if the money had been transferred into the offset account I could have offset the interest for 6 months, however small it is.

    Recently, after getting the house revalued, I established a LOC. I have never used the money in the LOC and thought maybe I should transfer the $2000 in my share account to the Offset account, and "borrow" $2000 from the LOC account. That way I am able to claim the interest every month for tax purposes.

    My question now is if I do this can I claim the interest from LOC when I lodge tax return and is this correctly understanding of debt recycling?
     
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  2. Simon Hampel

    Simon Hampel Founder Staff Member

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    So you have:
    1. a PPOR
    2. an offset account against that PPOR
    3. a LOC secured against that PPOR
    4. a share account
    ... and you want to:
    1. put all income and spare cash into your offset account to minimise your non-deductible PPOR debt
    2. draw down on your LOC and use this capital to invest in shares
    3. not use the LOC for any other non-investment purposes
    4. claim the interest on the LOC as a tax deduction
    Right?

    Sounds like a great plan to me!

    Now you just need to work out what to invest in. But that's a different question.
     
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  3. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Yes tat would be debt recycling. Keeping cash in the offset saves non deductible interest and borrowing to invest in income producing shares would make the interest on these borrowings deductible.
     
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  4. Meisterin

    Meisterin Well-Known Member

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    Good to get a confirmation from the experts.

    Now thinking that I may need to split the LOC into 3 for different purposes as the funds should not be mixed: 1 for share investing, 2 personal use 3 director's loan to the company.
     
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  5. Simon Hampel

    Simon Hampel Founder Staff Member

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    Absolutely - this is critical.

    You need to be able to clearly show that the funds were used for the purpose you claim and avoid mixing to prevent the loans becoming "contaminated" with non-deductible borrowings.
     
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  6. C-mac

    C-mac Well-Known Member

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    I like this strategy, but know little about how to set up these 'splits' in an LOC?

    For instance - let's say I take out a LOC for say $100K capacity, against my PPOR.
    Do I simply call up the bank and say 'give me 3 x loan splits in my online banking for this $100K' ?

    I.e. $33.33K per account 'split'. Then, do I just label the splits as: personal spending, shares investment, and (for example) cryptocurrency investment?

    Hiflo's post mentions a 'director's loan to the company'. Am I to assume that for someone to successfully debt-recycle in this fashion they then need to start up a company (ABN number etc.)? Or have I misread the above?
     
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  7. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    It would depend on the bank. Some banks like Westpac for example, you would get your broker to ring up and organise a split. They will post out a short variation document for you to sign.

    Other lenders such as AMP on the Master Limit facility you just fill in a short form and they will split the loans - I don't think there is anything furhter to sign.

    But some other lenders are a real pain in the arse.

    Labelling the loans doesn't matter for tax purposes but can be good administratively for you to keep track.

    No need to have a company or use a company in any way to debt recycle. Recycling debt merely involves paying down bad debt so you can reborrow to invest - thereby creating good debt.
     
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  8. kum yin lau

    kum yin lau Well-Known Member

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    Hi, for shares, $1000 is a very small amount. What it means is that your transaction cost is a bigger %

    Eg $9999 lots incur $19.95 brokerage cost = 0.2 %

    $1000 same brokerage = 2%

    Hope my maths is correct

    KY
     
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  9. Corey Batt

    Corey Batt Well-Known Member

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    Correct. Depending on the brokerage - some will charge % based whilst others will charge a fixed $ amount or a combination of the two. Overall definitely best to take into account the transactional costs to make sure you're buying your investments efficiently.

    This is where you do see some people looking at alternatives than direct shares - ie managed funds which you can setup direct debits/small purchase parcels.
     
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  10. noddy

    noddy New Member

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    Hi - I just stumbled on to this forum (looks good and covers topics that I'm interested in). I thought this could be of interest to people reading this thread - I have been using a debt recycling strategy for a number of years. I had a mortgage and an interest only investment loan with CBA secured by the family home. We re-financed early this year with Macquarie and got a split loan that has 2 loans (mortgage and investment) that have a combined global limit. So you can pay down the non-deductible debt and then make use of the extra space to invest with. It's very flexible and you don't have to contact them to adjust any loan limits. (Please don't think I jumped on here to push a product, that's definitely not the case - I'm just happy with it and it's a good way to do what people are discussing here).
     
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  11. goponcho__

    goponcho__ Well-Known Member

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    Question - which account should the interest on the split be paid from to avoid contamination? The main loan with offset okay, as the actual fee is being charged to split?


    Also if creating a split, does the money just sit there and not accrue interest until you transfer it out?
     
    Last edited by a moderator: 6th Apr, 2018
  12. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    If you pay interest from the loan you will be borrowing to pay interest - capitalising interest.

    You would generally pay the interest with cash, from the offset account. Get tax advice from your tax lawyer/agent on this.

    With the split it will depend on the bank. Many banks insist on paying the money out at settlement and not leaving it there. get credit advice from your broker on this part.
     
  13. goponcho__

    goponcho__ Well-Known Member

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    Much appreciated as always @Terryw
     
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