Automated investing in blue chip shares?

I guess you are advising lender when you doing split that you'll be using that for investment especially now when interest rates are different and reporting regime is strict.

Keen to to run through numbers on this and see how it works with 39% tax assume 100K income (e.g)
20K @ 5% IO loan = 1K deductible
6% yield = 1.2K income
1% franking credit = 200
net effect = 100K-1K+1.2K = $100200
Assume 39% tax on $100200 = $39078 - $200 Franking credit applied
Total= $38878

is that right??

 

Why pay down investment debt while you still have non-deductible debt? (if indeed you do?)

 

Not all banks will close the account. Even with those that do you might just leave $100 outstanding to prevent this and then apportion the interest - negligible %

 

It's not exactly how it works, assuming that it's a fully franked dividend, you'd get 514.29 in franking credits on a 1200 dividend, that 514.29 will also be included in the grossed up income, meaning that after the deduction your taxable income is $714 higher but the 514.29 is a refundable offset and the tax payable on that 714 is roughly 279, so you'd get a higher refund in this scenario by 235, give or take, being the difference in the franking credits and the extra tax.

This is less effective the higher the tax rate while at lower incomes it's more effective.

If you also use DRP in this scenario to compound the original investment then next year you'd have 21200 paying that 6%, any capital growth being bonus. You've also got that small tax refund/saving to play with.

 

Ah ofcourse and to this I guess you would be moving into a debt recycling strategy?

E.G - PPOR loan of 500k
Release 50k of useable equity via a LOC and invest into LIC's (tax deductible).
All your normal income goes into the PPOR debt along with the share dividends/franking credits reducing the non deductible debt faster.

Once say 10k more equity is available, increase the LOC size and buy 10k more of deductible shares, rinse and repeat.

Soon the PPOR debt is 300k and the LOC is 250k.

Is that correct?

Obviously this could also be achieved using property but I imagine much harder given you need the property to be CF+?

 

Hi,

How did u get 514.29 as franking credits on a 1200 annual dividend assuming salary is 100k. Also I m bit lost on how it impacts higher income earners. Would read up some more material.

 

Franking credits are a mechanism to avoid paying tax twice, they represent the tax that the company has already paid, so a fully franked dividend has already had tax paid on it at 30%, to work out the franking credits on a FF dividend you multiply by 3 then divide by 7.

The reason they're not as favourable for those in higher brackets is because their marginal tax rates are higher than the 30% for companies and as such the gross up that a fully franked dividend includes (ie. the franking credits) pushes the income higher and extra tax will be payable above what the franking credits will cover.

To put in a very rough example...

You receive $1 of franking credits...

If your tax rate is 0% you get the full dollar back.

If your tax rate is 15% you would get half the franking credits back.

If your tax rate is 30% you would pay no additional tax and get no refund.

If your tax rate is 45% then you'd have to pay tax of 15c, essentially the franking credit only offsets the 30c of tax and you'd have 45c on that dollar.

This is an oversimplification to illustrate the point and it's not quite that simple but this illustrates why franked dividends are so favourable in a superfund where tax is paid at 15%, so the gross up is actually beneficial.

The graph I posted on the previous page shows the impact that your tax rate can have on a franked dividend and it's real value after tax can change depending on your situation which is why it's so important to think about how you structure your investments.

 

consider this scenario. 300k PPOR loan. 250k savings sitting against this loan in offset. Considering above strategy divide the 300K loan in to 250K & 50K. use 49.9K sitting in offset to pay off that split (leaving $100 to keep account open) and redraw that 49.9K and park it in brand new offset against the 50K loan. Use these 49.9K to purchase income producing shares/etf/lic etc.....interest on this 49.9K is deductible as its for investment purposes...

dividing existing 300K loan into 250K & 50K is that refinance (full application) or something can be done quickly in bank branch?

Once you draw 49.9K into brand new offset do you have to invest the whole amount in bulk or can do it gradually? In either case is there issue from tax deductibility point of view?

eventually when you sell down the shares/etf/lic bought using 49.9K, I assume you pay CGT but if holding more than 12 months then 50 discount...is that correct?

 

Whats with all that parking!!?

Why not split the loan. set up a $50k LOC and borrow to buy income producing shares.

When they go up to $70k consider selling the shares, paying $5k in CGT and $15k off your home loan and then repeating.

 

current 300K loan is IO with offset. Parking considering 50K split is setup as new standard IO loan with offset account. I understand whole parking issue can be eliminated by using LOC as product....

lets consider LOC is used for split....again even in that case will lender consider 300K split in 250K standard loan and 50K LOC as refinance (i.e. new application) or can it be done over the phone/branch....debt is staying the same but one can argue that interest rate for LOC will be higher than standard loan so bank may have to review serviceability...

 

Great idea @Gockie !

 

It depends on the bank. Some you can easily split loans after settlement - westpac for example. You can also use IO loans like a LOC by paying directly from the loan - westpac for example.

 

Just one thing about debt recycling ; all the modelling I've seen shows a stable + growing capital base, its just a free kick no brainer right? Be prepared to see you capital base reduced by 40% and dividends by 50%. Then consider how attractive this is. If you can resist the panic that will ensue (easy to say now - you wont know until it happens) and handle being underwater for a number of years while being bombarded with noise then you can consider a debt recycling strategy.

 

It's a valid point - however having the LOC (or similar) secured against a property helps with at least some additional peace of mind. If they both drop 40-50% though then you might need a Plan C,

NOTE: I'm not currently debt recycling.

 

yeah sure debt is non callable, but regardless, you are looking at a big paper loss and the media is telling you its the end of the world, end of equities etc. Many will pull the pin at precisely the wrong time.

 

There was some very good posts about that 2008 "GFC" in the other site about what people did during that period,some sold out low others bought in low and the variability of different investors portfolios when you combine variance and the returns..

 

Thanks. I'll check with my lender considering given current environment they may force it to be full application.

I assume anyone who is using this strategy needs to update lender on what that split is used for. i.e. investment purposes especially when rates r different for investments loans ? don't they??

Falcon, i get what you mean. Debt recycling or not asset selection (shares/ETF,LIC) is key and ability to hold that to survive difficult times...

 

no

 

curious, is it because you are not required to OR bank just doesn't ask when you redraw. do ATO & bank do the data matching on investment loans per bank per customer cause this may get noticed....guess this wouldn't have been an issue if rates were same for all...