Managed Funds Leverage into Navra fund?

Discussion in 'Shares & Funds' started by D.T._, 24th Aug, 2005.

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  1. Andrew__

    Andrew__ Member

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    Sorry, but that makes no sense at all. There is negative gains to be had applying
    income derived to a non-deductable loan at 6.5% while allowing another
    non-deductable loan (the capitalised interest portion of the margin loan) to
    grow at 8.5%.

    You're saving 6.5% to pay 8.5%, the quantity of deductable funds hasn't changed
    one bit.

    If we were talking about the free cashflow after interest payments have been made
    it would be a different story, there is no debate that this is better applied to a PPOR
    loan rather than reducing the margin.

    Happy for someone to point out another way, please do.
    andy
     
  2. Mark Laszczuk

    Mark Laszczuk Well-Known Member

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    Andy,

    The 8.5% on the margin loan is still deductible, it's just the capitalised bit on top of the 8.5% that isn't.
     
  3. Andrew__

    Andrew__ Member

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    Exactly my point. The original margin loan is deductable, but any capitalised
    portion is not, so what is the point of allowing interest to capitalise while diverting
    the income from the fund into a lower interest rate non-deductable loan?

    andy
     
  4. Simon Hampel

    Simon Hampel Founder Staff Member

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    Sounds like we need another spreadsheet :D
     
  5. D.T._

    D.T._ Well-Known Member

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    Bring it Sim :)
     
  6. Simon Hampel

    Simon Hampel Founder Staff Member

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    If someone else cares to put one together that would be great ... going to take me a couple of days before I get time to do something reasonable.
     
  7. NickM

    NickM Well-Known Member

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    Interesting discussion guys.

    Harts case discussed split loans and deductibility of interest. I intend on publishing a paper soon on this issue.

    The ATO has a register of Private Binding Rulings which whilst they cannot be relied on in their entireity by anyone other than the person for whom the ruling was prepared, they do provide us with an indication of the ATO's view.

    These 2 rulings address the deductibility of capitalised interest not dissimilar to the situations discussed below.

    Your personal circumstances may affect deductibility, however if structured correctly the capitalised interest may well be deductible.

    http://www.ato.gov.au/rba/content.asp?doc=/rba/content/20834.htm

    http://www.ato.gov.au/rba/content.asp?doc=/rba/content/52211.htm

    Looking forward to seeing your spreadsheet Sim ! ;)
     
  8. Steve Navra

    Steve Navra Well-Known Member

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    Hi All,

    So sorry that I have been absent for a while . . . still in Canberra and then on to Melb. Hope to be back in Sydney late next week and then I will be posting on an every day basis.

    As per NicM's tax rulings above, I am strongly of the opinion that the capitalised interest IS deductible.

    From a structure point of view and very much within the 'spirit of the act' it seems clear that the deduction is valid on the following basis:

    The purpose of the loan (and the capitalisation thereon) is in the production of income. The share fund is an income producing asset . . . The Navra funds are INCOME funds. The income received is TAXABLE, so the taxman is getting his share.

    Furthermore the 'use' of the funds is also relevant:

    Marc L suggested using the funds to pay down non deductible debt. (PPOR mortgage) I generally suggest using this income to fund all the portfolio holding costs. Usually these (after tax) holding costs are funded by one's after tax income . . . so if this is now funded by your share fund income, it frees up this use of your own money, which can then be used to pay down your non deductible home mortgage.

    Even though in terms of the rulings as shown above this extra step (arms length) is not really necessary in order to claim the deduction, it makes the explanation of the 'use' of the funds towards an income producing asset more logically acceptable.

    Example of the benefit for cashflow purposes:

    Share fund value $300,000 with a loan (margin) of $150,000. [50%]

    Income at 10% = $30,000
    Interest on margin loan at 8% = $12,000

    If one were to pay the interest then the net income would be $18,000

    However on capitalising the interest you have the use of the full $30,000!
    Very useful for lifestyle purposes :)

    BUT . . . your loan will increase to $162,000 :mad:

    Ah . . . but now the miracle:
    The $300,000 will also have achieved some capital growth say at 5% = $15,000 :D

    So Fund value increases by $15k and loan increases by $12k
    $315,000 / $162,000 = 51.43%

    So the loan has increased marginally.

    One can either allow the margin to slowly increase and then top up the share fund when the fund does better than the 10% income. (Like last year with a 16% income return) or do a value add drawdown against the growth in the property portfolio and increase the share portfolio to bring the margin back to the 50% level. (Or whatever level suits your own SANF)

    Mainly though, my clients are using this method to achieve a better lifestyle journey as a result of the enhanced cashflow.

    It is all about the structure :p

    Regards,

    Steve

    PS: I suggest that these using this method, download the two rulings above and offer these to your accountant. If your accountant then still thinks it necessary he/she might suggest you obtain your own individual tax ruling.
     
  9. Andrew__

    Andrew__ Member

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    I love being wrong when I get to hear news like this.

    Nice one, thanks NickM and Steve for the good word.

    andy
     
  10. Qaz

    Qaz Member

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    Might be an idea for a poll quesion to ask to what level everyone here gears into the Navra fund.
     
  11. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    Hiya

    Im neither an acctant, a financial planner or a solicitor, merely making a comment.

    The major thing in my view with HART vs ATO is that it was designed to put a stop to the mortgage products that were obviously targetting the tax savings only (sitting duck for 4A) and one mass marketed product in particular.

    Its a cute attempt at scaring the masses which it certainly has done, but you can get products today that achieve similar things even now.

    Like a 3 % rate on the home loan and a 10 % equivalent rate on the IP loan. But because they arent being pushed hard, the ATO will leave them alone for more productive fodder, like lo doc loans at the moment. If you use lo doc loans, lets hope you have lodged rtns, and you havent sourced the product through an accountant.

    Capped interest in itself isnt an issue, if it were the vast majority of businesses with their highish debt to equity ratios would be in strife.

    I always advise to get your tax people to sign off on it.

    As Steve said, its all in the structure, or as others - the devil is always in the detail.

    ta

    rolf
     
  12. perky

    perky Well-Known Member

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    What Steve has described is the way I have been doing it for a while.
    My dividends have been paying off my bad debt - and within a few weeks I will finally pay off my mortgage. :)
    Problem is that the interest has been capitilising on my investment LOC - however soon I will be putting extra money in there each month to keep it stable.
     
  13. Gonzo

    Gonzo Active Member

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    How about a more generic question ? I gear into a few funds, but don't own the Navra fund.
     
  14. OLI__

    OLI__ Well-Known Member

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    When you apply for a margin loan with BT, or any other lender, to invest in the Navra fund do they take the income from the fund into account when they assess your serviceability?
     
  15. Simon Hampel

    Simon Hampel Founder Staff Member

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    Leveraged Equities didn't seem interested in whether I was able to service the loan - don't think it matters so much with margin loans.
     
  16. hillsguy

    hillsguy Well-Known Member

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    Great post. Simple and easy to follow. :D

    Perky : thanks for the tip of the discount. I was not aware it was available for Westpac customers on a professional package.
     
  17. perky

    perky Well-Known Member

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    No problems :)
     
  18. Steve Navra

    Steve Navra Well-Known Member

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    The margin lenders after assessing the risk profile of the fund will regard the shares as sufficient security for the loan and the distributed income as sufficient serviceability. Your income does not come into the calculation. :cool:

    Regards,
    Steve
     
  19. Simon Hampel

    Simon Hampel Founder Staff Member

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    I was actually surprised at how easy the margin loan application was - especially in comparison to the recent IP loan applications I've had to do - required an interpreter (broker) !!
     
  20. hillsguy

    hillsguy Well-Known Member

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    Steve, I have a few questions ...

    1) Using the example you gave and assuming you did not need the 10% income for lifestyle (ie $30K) and chose to re-invest it in the Navra fund. Also, assuming 5% CG growth the following year. Are these figures below correct ?

    Original Share fund value = $300K
    Original Margin Loan = $150K
    After 10% Income reinvested.
    Share fund value = $330K
    CG Growth on original share fund = $15K :D

    Net, net ... New Share fund value $345K with a loan ( margin ) of $162. [46.9%]


    2) Again, using the example you gave ... Could you top up the $30K with an additional $30K from BT ( Yes or No ? )

    3) If #2 is possible would the figures below be correct ?

    Original Share fund value = $300K
    Original Margin Loan = $150K
    After 10% Income reinvested.
    Share fund value = $330K
    Additional BT Margin Loan = $30K
    CG Growth on original share fund = $15K :D

    Net, net ... New Share fund value $375K with a loan ( margin ) of $192. [51.2%]
     

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