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Debt Recycling deductability

Discussion in 'Accounting, Tax & Legal' started by Jett_81, 26th Jan, 2010.

  1. Jett_81

    Jett_81 Member

    Joined:
    30th Dec, 2008
    Posts:
    7
    Location:
    Melb, Vic
    Hi guys

    Hope someone can help. My situation is I have my interest only home loan of 415K on a house worth 600K

    As I have extra equity on it I have an interest only equity loan of 33K and also a Margin Loan for 33K. This combined 66K is invested in direct equities.

    My question is I currently pay the monthly interest costs for both the equity loan and ML out of my Savings offset account linked to my home loan where my pay goes in and offsets against my PPR

    I am now starting to receive dividends from these shares. Am I fine to get these credited to my savings account and then keep paying off both loans each month from this savings offset account?

    Is this fine come tax time? I have all the dividend statements. Is this the smart thing to be doing? Should i be crediting these dividends straight to the IO equity loan or ML? Does it make a difference

    Anyone else have their own ways of doing this? A newbie would be interested to hear from the experienced ppl out there.

    I also have some accumulated cash in my offset acc which i will be looking to pay into the home and extend the equity loan and ML soon to keep the debt recycling going. Just want to make sure Im doing it ok before I proceed deeper
     
  2. GregR

    GregR Reid Consultants

    Joined:
    13th Jul, 2009
    Posts:
    273
    Location:
    Berwick Vic
    Jett,
    There are previous posts on debt recycling worth reading.
    From a brief read of what you are doing, I would suggest you should go further to do it effectively.
    Set up another investment LOC facility against your PPOR if you can taking you up to an 80% LVR (or higher), perhaps another $32k if possible.

    You use this new LOC facility to pay the interest for the equity loan and margin loan and put any salary and dividend into the offset. What you want to do is reduce the non deductible interest component while 'allowing' the deductible interest component to build as long as they are separate facilities. This presumes you have an effective offset where it is 100% and for the IO home loan, the interest component charged and transferred from the offset reduces based on the offset balance each month.

    Debt recycling can be an effective strategy.
    It sounds as if you need to do some more reading to make sure you have set it up and are using it effectively. The next stage will be to revalue and refinance to extract further equity and invest again as long as you are comfortable with the increased debt levels and servicing risk.
    Greg
     
  3. Jett_81

    Jett_81 Member

    Joined:
    30th Dec, 2008
    Posts:
    7
    Location:
    Melb, Vic
    Hi Greg

    Thankyou for your time and response. the investment loan was set at 33K as the house was bought for 560K and 33K took me to the 80% limit before LMI kicked in.

    Just need to know that if I funnel all the dividends earnt from my direct shares bought by my loans into my savings interest only PPOR offset account can I use this to physically pay off my two loans?

    1. My 33K IO investment loan secured against my PPOR at 5.74%
    2. My 33K Margin Loan at 7.99%.

    Obviously I'm negatively geared and aiming for capital growth long term as my income/dividends will only be about 4%pa. Can I claim the payments I make to make up the difference as a deduction as it will come out of my savings offset account at the end of the year?

    Does that make sense?
     
  4. GregR

    GregR Reid Consultants

    Joined:
    13th Jul, 2009
    Posts:
    273
    Location:
    Berwick Vic
    Jett,
    I am not sure you are debt recycling in the true sense from what you are saying. You are simply using your offset a/c as a bank account where income comes in and payments go out. It is simply tied to your home loan.

    The interest on the investment and margin loans can be claimed as deductible expenses as they are related to earning income (dividends). It does not matter from what account or how the interest is paid.

    Depending on your marginal tax rate, you decide whether to use surplus funds to reduce your margin loan or increase your offset balance (or reduce your home loan depending on your long term intentions).
    Good luck
    Greg