Investment through non working spouse

Discussion in 'Share Investing Strategies, Theories & Education' started by Hanso, 14th Dec, 2016.

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  1. Hanso

    Hanso Active Member

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    So my wife is set to go on maternity leave in the coming months and it has got me thinking, having zero income is there any investment vehicle in particular that is better suited to this circumstance? Highly franked dividend returning stocks/etfs?

    Currently have 100K in the offset against the PPOR that can be used to invest. Given my wife will pay no tax unless there are some out of this world returns on 100k I can't think of any reason to recycle this debt as deductible?

    At the moment it's a case of I don't know, what I don't know, so not entirely sure what good questions around making the most of this opportunity would be?

    I assume many have been here before so interested to hear thoughts or real life examples of how best to invest.
     
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  2. Simon Hampel

    Simon Hampel Founder Staff Member

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    Franked dividends are attractive because you'll not only get the dividend, but a nice tax bonus as well.

    However, unless the after-tax return from those dividends is going to be more than what you're saving in interest, it's a no brainer - leave the money where it is.

    An offset account on a PPOR loan is pretty hard to beat for guaranteed returns.

    I guess it will come down to your level of confidence in being able to generate sufficient returns to justify the risk?

    If you do have the confidence, you may be better to look at your options around paying some of the money in offset into your PPOR loan and then setting up a separate LOC or secondary loan (separate to your PPOR loan) to draw deductible debt for investment purposes. You'd need to check with your lender to see if that's possible.

    Taking money out of a PPOR offset for investment is not very tax effective compared to paying it off the PPOR loan and borrowing the money back for investment.

    However, if you ever intend to move out of your PPOR and keep it as an investment property, you'd want to think carefully through the ramifications of that strategy.
     
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  3. Terry_w

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

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    Think of the future. Will she be off work long term?
     
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  4. Hanso

    Hanso Active Member

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    Thinking over the term of her not working 1-3 yrs anything bought could be sold and over that duration I wouldn't imagine capital gains wouldnt result in max tax being owed for capital gains.

    In relation to the debt recycling I just didn't see the benefit if the approach above is taken (this could have some major flaws I'm not aware of). I've not gone through three process before so not sure how much effort is involved, but it is in the radar as I have around 300k in the offset currently, with a equity release loan already set up that I could redraw the balance to.

    Using VAS as an example since inception distributions have been 4.6% at approx 70-80% franked. If my calculations are correct at 70% franked it would be around a 5.98% yield so on 100k would be better off by 1980 per year. Obviously the question is if for 2k it's worth it, understanding past performance is not an indicator of future perfomance.

    Is there any major flaws in the above?
     
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  5. Simon Hampel

    Simon Hampel Founder Staff Member

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    Don't forget that capital growth should factor into the equation - if you can get 5%pa+ CG as well with franked dividends covering your holding costs, then it's basically money for nothing.

    Of course, there is always the risk that your capital decreases in value too, plus interest rates going up will eat into your returns ... but over the longer term, you should come out on top.
     
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  6. AnthonyK

    AnthonyK Active Member

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    Hi Simon and All

    I am in two minds about this approach.

    1. The offset account is hard to beat - it involves no real external risk and the savings are Tax Free!

    These two points are hard to beat., but:

    2. The actual return is very low because of the current low interest rates.

    Maybe applying some/all of the funds available to home improvements to accommodate baby will be better long term and are still CGT Free (PPOR) perhaps that makes it a better use of funds?
    AK


    .
     
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  7. Simon Hampel

    Simon Hampel Founder Staff Member

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    That does kind of assume that the house actually needs improvement.

    One assumes they already have suitable accommodation given that the original post was from December. And doing a major addition with a baby in the house is going to be problematic because you'd likely need to down tools whenever the baby was asleep.

    Either way, I'm assuming you're talking about things like adding an extra room to the house? You'd want to do some careful research to work out whether houses with an extra bedroom are selling for more than it would cost to build that. Many people overcapitalise on home improvements (especially on a PPOR), so I'm not generally a fan of using that as an investment strategy (buying an older/tired house and doing a whole-house renovation can work though).

    Being a little more tactical - renovating a bathroom to add a bathtub can be useful and more attractive for families if you have an IP - but I'm not sure it adds much value to a PPOR (from a resale point of view). It still may be worth doing simply from a practicality perspective.
     
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