Debt recycling and mixed loans

Hi guys,

Few questions I have had in regards to some practical assets of debt recycling

1) When debt recycling, i understand if you paydown a split and the redraw it this money must take no detours when going into an investment account to purchase income producing assets (shares).

Question is, if i want to also use some other funds to purchase non income producing shares (for capital gains, hopefully), must this be into a different investment account the above one?

I.e, will i need to separate account numbers on commsec/CBA for example?

2) If i get one large split of say 200k, can i pay this down fully, then redraw eg 50k at a time straight into an income producing investment account?

3) If i want to sell some of my income producing shares, can i merely transfer this back to my split and not mix anything?

4) The dividends should go into another non deductible split right?

Thanks

 

Yes you would ideally have separate splits for income and non-income assets as interest would be a cost based expense. You could have one loan and apportion it but it may get messy.
2. If you invest in income producing assets then yes
3. You can pay off the relevant portion of the loan. See my tax tip on the exception to splitting
4. Probably best

 

Thanks, as usual Terry_w, much appreciated re answers 1-4!

Regarding 3, just read through your tax tip - that relates to mixed loans. I was meaning if the split was solely for income producing assets (not a mixed purpose loan). I can transfer for example a capital gain back into the loan for a while, before i take it out to make another purchase, and not mix anything right?

 

You would pay off the loan. Without closing it though and then loan recycle, use it again

 

Do i need to pay off the whole loan split?

Say i paydown a 100k split, take it out for investment purposes. Then say sell some shares for 10k, can pay the loan back down 10k for a while so loan sits at 90k for a while until i find another opportunity down the track?

 

You would only want to repay the amount you borrowed to buy the shares

 

Why not more than the amount borrowed, ie any profit?
It would just paydown the loan a little and save some (deductible) interest temporarily, which you can redraw when you take it out again?

Last question sorry, thanks for your time!

 

you could always pay extra into a loan, or store the profit in an offset account - more tax effective that way if you have non-deductible debt this would be further debt recycling.

 

Paying down MORE deductible debt that is necessary reduces deductions for interest on other shares perhaps ? This is contrary to the aim of debt recycling if you are discharging tax deduction debt o debt recycle it could be a $0 effect however.

 

My concern was if i make a profit and sell some shares, if i then deposit the proceeds in an offset account against non-deductible debt, then would that not mean i am not using the funds for income producing purposes and thus the borrowing is no longer deductible?

 

If the shares were acquired using borrowed funds then on sale that portion of the loan should be repaid ONLY for the sum originally borrowed OR the proceeds on sale (whichever is less) as that part is now not eligible for a deduction since the original use of the borrowing has ended. . Any proceeds can go wherever you want after that occurs.

 

borrowing is no longer deductible if you sell the original asset borrowed for. It doesn’t matter where the proceeds are deposited

 

Hi Terry and Paul,

I had a split loan of 20K and money was in a separate offset account. 10$ has been deducted from the offset account. I still have remaining funds in that offset. Can I add 10 dollars to the offset so that I dont have to pay any interest till I actually invest the money . If I do that will my contaminate the loan ?

 

Paying down a loan doesn’t contaminate it. But redrawing could

 

10/20000 is now non-deductible when interest is charged. This is agood example of tainting a borrowing by not making it directly for a income producing prupose. Fix it perhaps IF you have redraw on the loan and it doesnt autoclose by repaying the loan with the full 200000 and then waiting until you want to use the $20000 and drawing it clean and directly for its purpose

 

Thanks Terry & Paul.

If one buys one income producing parcel of shares, then puts money to cash for a while, then buys another parcel of income producing shares... is the ATO that finnicky that they would consider this not being purely for investment purposes?

When buying shares the liquidity and moving in out of shares would make it too difficult to manage if traded any frequency!
Ie if we needed a split for each parcel

 

If you sell shares and don't pay off the loan, the interest is no longer deductible.
If you then use cash from the sale to buy shares you haven't borrowed.

 

its a interest only fixed loan with offset . So I cannot payback the loan yet . So I can add 10$ to offset so that I dont have to pay interest or just leave as it is and do manual calculations on for tax purposes.

 

If the $10 was redraw for something other than the property it is a mixed loan and depositing $10 into the loan won't come off that $10 was that redrawn.

But what % of the loan is $10?

 

Thanks Terry,
0.007 % at this stage . Could go upto 0.035 % by the time i invest the money.