Gearing on Shares

Dividends are a slow and tedious way to grow wealth. You should invest for growth. Sell down some of your growth shares after one year depending on the tax bracket it puts you in. Pay lump sums of you home. Then LOC to buy shares again. After 3 or 5 years you could have your home loan paid off. You could buy some investment properties have the rent pay off LOC . You don't need to use dividends to pay LOC.

 

That's a great advice.In my case the home loan is almost paid off and also have an investment property. Not very keen on acquiring another investment property.

To diversify, I have now an equity loan (LOC) set up ready to invest and achieve growth. Looking at long term of 10-15 years.

I am confused whether it's a good idea to
- get the dividends paid into the equity loan (LOC)
- Slowly build it up and then purchase new shares from LOC.
- Repeat this every quarter

Or
- to get the dividends paid into a bank account
- Slowly build the bank account with dividends
- Pay the dividends into equity loan (LOC)
- Then purchase new shares from LOC.
- Repeat this every quarter.

Which of the above is ideal from tax perspective ?

I am also looking at maximising the super contribution. Salary other bonuses will be used to buy ETFs & LICs on wife's name as she is in the lower income bracket.

 

Is the bank account an offset account? if not why not?
You will be losing interest with the second method.

 

Yes seen that, but you must still need somewhere to keep the cash, without contaminating the LOC.

 

I can request bank to set up a brand new account to deposit the dividends. Once a certain amount is reached, can I pay it back to LOC and then redraw to buy new shares?
Hope this will make it clean and doesn't contaminate the loan

 

Hi @gkp, I think you may be confused.

Paying down a loan with cash (ie dividends or from other sources) doesn't contaiminate the loan. However - it will reduces the loan amount and hence the interest you are charged by the bank, and hence the tax deduction available to you.

Conversely, if you were to redraw (ie create a new borrowing) from your LOC and use the funds to buy somthing that doesn't generate income (ie personal living expenses), then you will have contaminated your loan.

 

Why do that?

 

Got it now. I think better opt for DRP of dividends instead getting paid.

 

I think I got confused myself.
Below was my original understanding.
Step 1:say 50k equity release.
Step2: But ETFs/LICs
Step3: Get dividends paid back to LOC
redraw again to buy.

The point I missed is the maximum tax deductions I can make is on 50k at any given point as I have used all the funds at step 1. If I pay say 10k at step3 and redraw the 10k again, the max deductions applicable will still be 50k. I am I right or missing something again here

I will better opt for DRP to avoid all this unnecessary.

 

Base on what you've described, yes your maximum deductable debt would be 50K

 

You might want to get some financial advice on DRP.

Btw why are you not using a term loan with offset?

 

Don't know about this.
This is what I got
Access Equity

May I know the benefit of term loan over LOC ?

Thank you.

 

Term loans have lower rates, offset accounts and can't be called in early unlike a LOC

 

Great. Will check with the bank. Thank you