Debt recycling

Sorry, I'm quoting myself here, because I forgot to make one point:

In recent times some entities have guaranteed higher interest rates, which would ensure positive gearing: Fincorp, Westpoint, etc

You can have your cake and eat it too...
There's no risk, it's bank guaranteed!
(yeah right, by the Kebble Investment 'Bank').

My point? Investment is about planning, managing risk, managing cashflow, reviewing investements, playing devil's advocate before you burn your money, etc.
If it sounds too good to be true...

 

100% agree with you Rob, don't mean to override your comments, just trying to add some extra flavour to the mix.

 

First thing: this is a common misconception that people have that helps them sleep at night. It is no more risky to leverage against your PPOR than it is your investment property, your shares, your car, or whatever. People somehow seprrate their PPOR from the rest of their assets in their mind for whatever reason - the fact is if it gets to a point where the bank comes chasing you, it makes no difference if you say "oh but I only leveraged against my investment property, my PPOR is debt free so you cant have that!" - it is all your assets and all vulnerable to litigation. So yes, there is risk in leveraging against your PPOR, but absolutely no more risk than leveraging against your IP or anything else.

Second: dont confuse your original question about DEBT RECYCLING with LOAN STRUCTURING using a loc. Again, they are different.
Loan structuring takes your EQUITY in your existing property, so you get a Line of Credit over a portion of your equity and if you use that for the purpose of creating a taxable income, it is deductible.
Debt Recycling takes your previously non-deductible DEBT (as distinct from your equity) and makes portions of it deductible.

As for the portion, the tax office does say that you do have to somehow apportion repayments, and their SUGGESTION (although they do say it is only a suggestion and there may be other reasonable methods of doing this) is on a percentage basis - ie if you have 50% non-deductible loan balance and 50% deductible loan balance, their suggested way to treat a repayment is that the repayment reduces both the non-deductible and the deductible amounts by 50% of the payment each.
Another way someone may deem to be a fair and reasonable method is to apportion all extra repayments as going against the earliest loan amounts on a first in first out type of basis (as your credit card company does when calculating interest). In the case of a PPOR Loan, this may mean you allocate all extra repayments to the oldest portion of the loan (being the original non-deductible loan). I am not aware that it has been tested in court though, if somone is aware of evidence to the contrary please let us know!

 

Domjan v FCT [2004] AATA 815

Whilst not a senior court - it appears we have now seen an independent confirmation of this unfortunate method.

Keep your accounts separate - don't mix business with pleasure as they say.

Cheers,

Rob

 

Na, that case has nothing to do with what we are talking about. She was using funds redrawn from her investment loans to fund private living expenses. We are talking about using funds redrawn from a homeloan purely for investment/taxable income production.
It definitely points out the need for solid record keeping, but I dont think it was ever suggested that funds redrawn from any loan, whether personal or investment related, would be deductible if used for private purposes

 

I read it as confirming the apportionment of amounts PAID BACK into a mixed use account. You cannot notionally pay down the private use portion only as it loses its traceability ?

If this is correct then it has much wider consequences.

Cheers,

Rob

 

have a look at the following:
TR 2000/2 - Income tax: deductibility of interest on moneys drawn down under line of credit facilities and redraw facilities (As at 1 March 2000)

True, you cannot notionally pay down the non-deductible portion in preference to the deductible portion, however it is possible that if you have a method based in logic and use it consistently (such as the ATO's example in the above tax ruling) then it is no problemo.

 

It can be simple. Your investment funds come from a separate LOC. If you like to keep a bit of cash for a rainy day, then keep it in an offset account against your PPOR (or in the PPOR 'buffer'). But don't use the investment LOC for private purposes, otherwise you're killing the tax benefits of the investment strategy (and opening up your accounts to tax office scrutiny).

The loans manager at any bank or a mortgage broker can go through this with you. With Westpac, the LOC is called an 'Equity Access Loan' ('EAL') and the interest rate is about 0.05% above the discounted variable rate.
Yes, you do need to go through an application process (after all they're giving you cash and they want to know if you can pay them back!) but they don't care one iota what you plan to do with the money.
But if you plan to use some for personal use (eg holiday), then don't ask for the full LOC amount they could give you - much better to maintain this personal use money in the PPOR buffer or an offset account.

 

Base on your strategy, I expand it as follow:

i.e Your PPOR loan is $200K. You sold all share portfolio - $100K and put all $110K (cash from selling share+dividend) into PPOR loan, then redraw $110 to reinvest into shares. Now your $110K loan is subject to tax deductive. Then repeat this: sell $110K put back in PPOR loan, and redraw to buy back $110K shares. Now you have another $110K tax deductive loan. Total tax deductive loan is now $220K whereas your real loan is $200K. So, this is unreasonable.

 

Evisional,

I think you are on the right lines, but your implementation is to simplistic.

Please read the thread, Loan recommendations?, for a fuller understanding.

Tailcat

 

Nope.

The first step is fine but if you sell the shares which are funded by a loan then you must use the funds to repay that loan not your home loan.

But if the capital had grown above the original loan then the excess can be used for the home loan.

Another idea is to borrow to buy a high income share/fund and use the income to repay nondeductible debt only.

Cheers,

 

Simon, I think you mean 'buy a high income investment'

Cheers

 

Simon, you are right. Now I know what I am wrong. Thanks a lot.

 

I've I'm a newbie to this site and have been following this thread with interest , has anybody got any comments on how this would work if have used the investment loan to purchase shares / MFunds via a Family Trust?

 

Can you elaborate with details - who borrowed & for what purpose ?

I don't see how mixed private use can happen with a Trust as benefits provided for beneficiaries are deemed present entitlements whilst the Trustee would not be mingling trust assets with their own.

Cheers,

Rob

 

You do not need to recyle your debt because your investment loan is tax deductible (if you use it for investments).

 

We haven't set up a LOC on our PPOR yet, as I was previously unaware we could use this method to turn our non-deductible debt into dedectible debt.

If for example I have $10k in my offset account for my PPOR, I could go to my lender and get them to set up an additional LOC account for the $10k (IO), which I would then only use for investment purposes. Am I then able to loan this $10k to our family trust to add to our share / MFund portfolio that is held within the trust and still claim a personal tax deduction against the interest on the LOC account (PPOR and mortgage being in my name only)? Would any capital gains that are made from the loaned amount still only be taxed via the trust?

 

The loan must be intended to produce YOUR assessable income.

Simply lending to your discretionary trust as a potential beneficiary is unlikely to be interest deductible. All a discretionary beneficiary has is a right to be considered when the Trustee exercises their discretion. This is usually considered too remote. (I assume you don't have a unit or hybrid trust).

You will need to talk to an Accountant, but most likely you will need to check the trust deed to see if it is permitted and then set up a commercial loan contract with the Trustee. The interest then becomes assessable to you and deductible to the Trustee. It should be commercially realistic and if less than commercial then you might find your deductions are limited to the income derived - you may have problems with gearing on your investment.

There might be similar problems for the trust if it has negative geared to a related party as losses are trapped in trusts and also the purpose of the loan will be scrutinised where it appears non-commercial.

Really negative gearing is aimed at giving individual small investors a tax break as an incentive.

This is definitely an area to get advice from a Financial Planner & Accountant BEFORE you act.

Cheers,

Rob

 

Thanks Rob.

I will speak to my accountant before doing anything, but from what you've said it looks the way to go is use the LOC loan to buy the capital growth shares in my name as they will be negatively geared and higher yielding shares via the Trust / Margin Loan that I've recently established with the aim to make that positively geared ASAP.

 

Can't give financial advice but negative gearing requires other assessable income to offset the loss against, and is generally more valuable to higher rate taxpayers.

Holding assets in a trust might be useful if you are likely to be sued.

So it is hard to generalise - it depends on your precise circumstances which is where an advisor earns their fees by considering your overall objectives.

Cheers,

Rob