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Hello Everyone and Debt recycling

Discussion in 'Introductions' started by jk5954, 29th Sep, 2019.

  1. jk5954

    jk5954 New Member

    Joined:
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    Location:
    Melbourne
    Hi Everyone,

    Not sure how much information to put in this so apologies for if this is too much.

    I have been investing in Vanguard ETF's (VAS) for approximately 5 years.

    About 2 years ago my now wife and I got married. I continued to invest in Vanguard ETF's but at a much lower % of income as I needed to pay for the wedding, we went on a trip to Europe for a month and we have been aggressively saving a deposit for a house. After getting married I invested in both my and my wife's name in seperate share accounts.

    This is where we currently stand:
    -Both my wife and I work full time. This could change in the next 2 years as we will be trying to start a family.
    -We currently have about $70k in VAS between the 2 of us. This is in seperate accounts and I have slightly more in my name.
    -My main super is a defined benefit fund with the Victorian Government. I salary sacrifice the max I am allowed to this super fund. This does not yet reach the Concessional Contribution limit so I also make voluntary concessional contributions. According to my super fund this defined benefit amount can be treated effectively as cash.
    -My super prior to starting this job and any voluntary concessional contributions I make are in a seperate accumulation fund with another company with lower fees and are all in International shares to diversify away from VAS.
    -We have made concessional contributions of $25k each over the last 2 years as part of the FHSSS.
    -We currently have enough money for a 15% house deposit on an amount I am comfortable we could make the repayments if we go down to 1 income for a number of years. The bank we have pre-approval with offers LVR of 85% with no LMI.
    -We are currently looking at houses and could potentially have a signed contract next week.

    I am familiar with Debt Recycling but have some general questions:
    -The bank we would be going with offers offsets, fee free loan splits and fee free redraws. Am I correct in thinking that to Debt recycle say we save up $10k in the offset. Split the loan into Split A (Principal - $10k) and Split B (10k). Pay down Split B and immediately redraw to purchase income producing shares.
    -We then direct any extra money as well all dividends into the offset which would be attached to Split A. When we had a further say $10k saved I do another split so that we would end up with Split A (Principal - $20k), Split B (The original $10k) and Split C (the new $10k). We would withdraw the money from the offset and pay down Split C before immediately redrawing to purchase shares. We could then combine Split B and Split C to simplify.

    -I am also wondering about whether I can sell what we currently have in VAS to debt recycle as well. From what I have read there are 2 potential issues: Wash Sale and Part IVa. I don't believe the Wash Sale would apply as we would have a Capital Gain on VAS. I am unsure about the Part IVa. Could I get around Part IVa by purchasing different shares say A200 or VDHG (and rebalancing Super to reflect as well). Or by selling the shares just after the contract is signed by us and the vendor, still borrowing 85% from our bank and doing debt recycling straight after settlement?

    Finally, is there a standard formula for how worthwhile the debt recycling is as in order to sell down the VAS there is CGT we would need to pay.

    Sorry for the long post and looking forward to learning from and contributing to this forum.
     
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  2. Terryw

    Terryw Well-Known Member

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    1. basically yes - but often the minimum split is $20k
    2. yes
    3 yes, but consider part iva
    4. no

    I wouldn't be incurring LMI on the loan if I were you, waste of money.

    get some advice before doing anything
     
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  3. Hodor

    Hodor Well-Known Member

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    hodor
    15% plus closing costs? - Just checking.

    What are your goals? Early retirement, pay off the house ASAP...? Have you considered the risks, how would you feel/handle a 50% drop in dividends and a long recovery? Can you afford the repayments from your pocket?

    You would need your cost base and sales price of the shares, tax rate now and going forwards, interest rates on loan and yield on the shares - both now and going forwards, length of life of loan. Some of these are known and some we have an idea of now yet the future is relatively unknown so we just can't be sure.
    Given VAS was purchased over the last 5 years you possibly/probably would end up ahead after a number of years.

    Is it worth the headache and part iva? I am no expert here (only a basic understanding), given your line of questioning I would be worried, a200 is very similar to VAS, VDHG is pretty different and it would be easier to show you are diversifying away from AUS I would think. I like to stay straight and narrow, why not focus on what to do going forwards.
     
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  4. jk5954

    jk5954 New Member

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    Location:
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    Thanks Terryw.

    Through my bank we can borrow 85% LVR and not incur LMI.

    Should it be an accountant or a tax lawyer that I get advice from?
     
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  5. jk5954

    jk5954 New Member

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    Location:
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    Yes 15% plus closing costs

    Goal would be wealth creation and tax minimisation with the potential for early retirement. I think I have considered the risks in terms of the overall loan. I would view the whole portfolio as buy and hold for the long term with the repayments able to be made from just my income. Anything further such as the dividends and the tax savings is cream on the top to be re-pumped into speeding up the recycling process and increasing net worth.



    When I first heard about Debt recycling I immediately liked the idea then I thought how can I use the money we have in shares to kick-start the process. But I am now thinking to focus on what to do going forwards is best.

    Thanks Hodor
     
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  6. Terryw

    Terryw Well-Known Member

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    Location:
    Sydney
    A tax agent or tax lawyer would be licensed.
     
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