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Seeking advice on structuring investment loan...

Discussion in 'Accounting, Tax & Legal' started by Derryn, 25th Aug, 2008.

  1. Derryn

    Derryn New Member

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    Long time reader first time poster.
    I have a question regarding investment borrowings.

    My PPOR is owned in joint names (wife and I) as is the loan.
    I would like to borrow against the equity in PPOR with both the loan and investments in my name (as I will be sole earner for foreseeable future - wife is stay at home mum) so I can maximise negative gearing benefits. Planning to buy and hold shares (mainly in STW - ASX 200 ETF).

    Is it possible to structure investment loan in this way? My current loan is with one of the big 4 banks.

    If it is NOT possible to have separate investment loan in my name only, if the investments are in my name, can the interest on the joint loan be attributable only to me?

    The following article seems to say NOT for share investments, but perhaps yes for property?

    A.R.M. Monthly Newsletter

    Any advice greatly appreciated.

    Derryn.
     
  2. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    I don't know why they worded their example like that - I'm not aware of any such limitations on claiming interest on borrowed money for "investments other than direct property" (but I'm not an accountant!).

    Generally, it is the ownership of the asset being purchased which determines deductibility of interest - not who is named on the loan, so it won't matter if you get a new "top-up" loan facility in both names (just make sure it is completely separate from the existing loan!!).

    If you then purchase the shares in your name only and declare all the income and capital gains in your tax return, you should then also be able to claim all the interest on the loan used to purchase those shares.

    Just remember that if you end up making a profit on the investment after all costs (including interest), then you may prefer to have the investment in your wife's name, since she would presumably be on a lower tax bracket!

    That being said, dividend yield on STW has typically been somewhere around 5 - 7%, so unless interest rates drop a lot, you aren't likely to be cashflow positive in the short term if you are effectively borrowing 100% of the purchase price.
     
  3. Derryn

    Derryn New Member

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    Thanks Sim.

    Further to this scenario, I have currently purchased shares out of a "Line of credit" type home loan, into which I direct deposit my salary.
    Now I think the problem with this for tax purposes is that any deposits into the loan are considered repayments on the "investment" loan portion and not the home loan.
    So in effect, if I use $5000 to purchase shares one day, and the next day deposit $5000 salary, then there is no investment borrowings in the loan.
    Just confirming this is the case?

    I am learning that it pays to have the right structure set BEFORE transacting.

    Cheers,
    Derryn.
     
  4. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    I'll have to defer to the accounting/tax experts, but yes, unfortunately I think you have it correct.

    Exactly!
     
  5. Billv

    Billv Getting there

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    Derryn

    I am not an accountant but from what I know the above is correct.
    You should have a separate LOC which is only used for buying shares.
    Some lenders allow you to have multiple LOC's attached to 1 property
    so there shouldn't be a problem in getting the structure right.
    What's the name of your loan?

    Cheers
     
  6. Rob G.

    Rob G. Well-Known Member

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    Or consider using an offset account.

    Cheers,

    Rob
     
  7. Terryw

    Terryw Well-Known Member

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    Hi

    I am not an accountant either, but believe you are making things very messy by combining investment and personal borrowings with a LOC.

    I believe the ATO will allocate each deposit in accordance with the percentage of your loan being an investment v personal.

    eg. Say you had a $95,000 loan which was used for personal expenses. You then borrowed $5,000 for shares. Total loan is $100,000. 95% of this is for personal expenses. 5% is for investment expenses and the interest is claimable.

    If you were to make a deposit of $5,000, ideally you would want this to come off the personal expense portion - to reduce non-deductible debt first.

    But since you have mixed your loan, any repayments you make must be in the same portion as the loan. So 95% of each repayment must come off the personal loan and 5% off the investment loan.

    As you can imagine things can get very messy to work out after a few withdrawals and deposits.

    This is why it is best to split the loan. Some banks, like St George, allow you to request sub accounts and change the limits on the LOC for a small fee.
     
  8. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Actually you may well find that the ATO will calculate it as if you had paid off the investment loan first :eek: I don't have any documentation to back this up - I just remember hearing it from an accountant at some point (you need to check with your accountant as to how they think it will work!).

    Either way, don't just assume you get to choose or that there is a logical or "fair" way to calculate it ... the ATO sets the rules and they can be a bit nasty about it all. Best to avoid in the first place if possible :(
     
  9. Rob G.

    Rob G. Well-Known Member

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    TR 2000/2

    An offset account linked to the investment loan is a preferred method for most people.

    Cheers,

    Rob
     
  10. Terryw

    Terryw Well-Known Member

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    Thanks Rob

    a quote from TR 2000/2 Income tax: deductibility of interest on moneys drawn down under line of credit facilities and redraw facilities

    20. The deductible interest percentage figure is calculated as follows:
    ((A + B) / (C + D)) * 100
    where
    A = opening balance (beginning of month) of outstanding principal used for income producing purposes;
    B = closing balance (end of month) of outstanding principal used for income producing purposes;
    C = opening balance of total outstanding principal;
    D = closing balance of total outstanding principal;
    Note: the closing balance for one month is the opening balance for the next month.

    21. Where a taxpayer makes repayments over and above the required minimum payment and the line of credit facility comprises one mixed purpose sub-account only, the taxpayer cannot choose to notionally allocate the repayments to a particular portion of the total debt, e.g., the non-income producing portion.
     
  11. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Cool - thanks for following up on that Terry.