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Buy shares using offset account

Discussion in 'Innovative Techniques' started by inspiredbyprop, 26th Feb, 2016.

  1. inspiredbyprop

    inspiredbyprop Well-Known Member

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    Hi Folks,
    Can anyone please share your thoughts on the following scenario?

    Assume I pulled out equity from the existing PPOR into a separate offset account (let's called this account#2). Now offset account#2 has a balance of $100k with 5% interest rate.
    If I use the full amount of 100k to buy:
    a) 50k shares for long term holding and it would giver a regular/guaranteed dividend every 6 months.
    b) 50k Shares for daily trade

    Questions:
    1. The dividend paid by share (a). Instead of putting it back into offset account#2 to reduce interest, can I put it into other accounts (e.g. my savings account)?
    2. With this volatile market and if there is a win (surplus) in the daily trade of share (b).
    Instead of putting it back into offset account#2 to reduce interest, can I put it into other accounts (e.g. my savings account)?

    I hope it all makes sense. But let me know if you have any questions.

    Thanks in advance.
     
  2. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    1. Yes.
    2. Yes but the interest wont be deductible if you had sole the shares relating to the borrowings.

    Overall i suggest you avoid doing what you propose.
     
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  3. inspiredbyprop

    inspiredbyprop Well-Known Member

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    Thanks Terry.
    Just to clarify, do you mean the interest only in the scenario #2 will not be deductible or it's applicable to both scenarios? Hence interest in scenario#1 will not be deductible as well.
     
  4. pinkboy

    pinkboy Well-Known Member Premium Member

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    Basically....if you sell the shares, and do not put the cash back into the loan they were purchased from, then the interest expense is not deductible anymore because you have put the cash to 'private' use (other savings, personal mortgage etc). You can't claim interest expenses on a loan where the shares relating don't exist anymore.

    pinkboy
     
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  5. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Pinkboy has answered. If there is no shares there is no income so loan has no connection to income.

    Why dont you set up a LOC and borrow to invest and debt recycle?
     
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  6. The Y-man

    The Y-man Moderator Staff Member

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    Why would you want to do this????

    If it's to increase tax deductibility what you are proposing sound like you want to make money for the banks, and keep less for yourself.

    Let's say you pay $100 in interest and get $30 back in tax relief. You are out of pocket $70.

    If you put the money back in the offset you don't pay the interest, but potentially pay $30 in tax on some other income. You are out of pocket $30.

    Which is better? Out of pocket $70 or out of pocket $30?


    The Y-man
     
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  7. inspiredbyprop

    inspiredbyprop Well-Known Member

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    Thanks Pinkyboy, but in my scenario #1 (I'm only referring to the dividend) and scenario#2 (only the win/surplus).
    The buy and sell amount will always coming out/in the offset account.
    Example for scenario#2: Let's assume this transaction happened on the same day. Hence no interest occurred. If I buy $1000 shares in the morning & later in the afternoon sell it for $1100. Hence, the offset account will have a surplus of $100. Can I move the $100 from my offset to savings account? I do not need to claim interest deduction (the transaction happened on the same day and no interest to be paid) as long as I can move the $100 win to reduce my other personal loan (for example)?


    Thanks Y-man, but I couldn't relate to your 2 scenarios. Could you please elaborate?
     
  8. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    An offset account is a savings account.
     
  9. inspiredbyprop

    inspiredbyprop Well-Known Member

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    This I know, may be I should say...
    Buy and Sell using account#2.
    Dividend or win initially goes into account#2. Then later, I would like to move the dividend/win into account#3. As I do not want the div/win to reduce the interest in account#2. Do you see any issue with that?
     
  10. radson

    radson Well-Known Member

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    This won't end well.
     
  11. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    I cant understand what you are trying to do.
     
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  12. inspiredbyprop

    inspiredbyprop Well-Known Member

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    Thanks Radson, I've been seeing and following some your posts re: shares, keep up the good work. Do you mean the method I intend to use won't end well or the conversation?
    Of couse, at the end of the day, I will seek professional advice before actually doing it.

    Reason of my question is to gauge whether shares could be one of my investment option.
     
  13. Hidare

    Hidare Active Member

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    Inspiredbyprop plans to move the extra money of dividend earned in scenario #1 and win/surplus in scenario #2 to his personal loan account in order to maximize deductible interest in account#2. And he can reduce the interest on his personal loan account, which is not deductible. This plan is worthy or not, depends on how big the extra money is, how much tax you can reduce. Not sure I am right?
    Hidare
     
  14. Bran

    Bran Well-Known Member

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    I'm no form of financial guy, but it's pretty simple - your dividends can go into your PPOR offset, but any buying/selling has to stay within the account your borrowed funds came from, otherwise they become mixed. No?

    Are you a successful trader? Might you be better off sticking it all in a dividend-ing portfolio with the dividends into your offset?
     
  15. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    If you borrow to buy shares and then sell those shares the interest will no longer be deductible.

    If you have a mixed loan, which it sounds like you will, you should pay down the capital used to buy the shares you sold and you should do this out of the proceeds of the sale. If you do this later your repayment will come off all parts of the loan.

    I have writeen a few tax tips which cover these topics.
     
  16. VB King

    VB King Well-Known Member

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    You have two strategies on shares which I would keep separate for the sake of safety. Traders can be taxed differently to buy & hold, and you may not want your buy & hold shares mixed with your trading portfolio.
     
  17. inspiredbyprop

    inspiredbyprop Well-Known Member

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    Thanks Hidare, you've got it 100%. That's my plan, I'm just checking with PCers in theory if there's any obvious issues. How much extra money, it doesn't really matter if the principle works. e.g. $1 is better than nothing :) But of course, I'm aiming for a sizeable return.

    Many thanks Bran, that's exactly what I want to hear. I'm not a trader yet (let alone successful). I'm still learning. As you said, initially I will aim for a combination of sustainable/relatively high dividend return (return of dividend > interest rate) and stable growth in the share price. The ultimate aim is to pay off my PPOR as soon as possible using the extra dividend and perhaps, sell shares to purchase an IP.

    Thanks Terry for your superb contribution to this forum. I've learnt a lot from your writings.
     
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  18. inspiredbyprop

    inspiredbyprop Well-Known Member

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    Thanks VB, i will keep that in mind. For traders, can I extract the "win" as soon as possible and put it into other use?
     
  19. Bran

    Bran Well-Known Member

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    Maybe see what the experts think, but if you aren't a trader, then an index fund WILL outperform you, as it does for 2/3 of managed funds. If it were me, I wouldn't allocate 50K to trading, would use 30-50K and then dribble more in over time, slightly more when the market is soft.

    My skin in the game equates to 3 stocks, and very small amounts, so I know little. But they are NAB, TLS and VAS. I'm setting up to do a whole lot more, but will be index/managed funds - the latter to make regular automatic contributions.
     
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  20. Daniel Taborsky

    Daniel Taborsky Well-Known Member Premium Member

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    I think it would be better to create 2 x 50K splits (instead of 1 x 100K split) because as @VB King said they may be taxed differently.

    I would be cautious about this. Directing the dividends into account#3 should be OK, but I wouldn't be directing the win surplus into another account. What would happen if you were in a net loss position and then had a win? Would you look to extract that profit? You are playing with fire.

    Assume you have a separate $50K split set up for trading (i.e. account#2). If you keep all the proceeds from share trading in account#2 (without moving the win surplus into a different account) then this is probably OK. The borrowed funds are either being used for share trading or are sitting in the offset account reducing interest. If you are in a net win position and want to extract the profits, a less risky way of doing this would be to (i) pay back the full $50K split, (ii) transfer the surplus to another account, (iii) reborrow the $50k (I'm assuming you can redraw) and start again. Maybe do this every month?
     
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