Help with debt recycling please

Discussion in 'Investment Strategy' started by SuOz, 2nd Jun, 2020.

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  1. SuOz

    SuOz Member

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    PC.com is amazing , great site & content . Me , newbie here , can some one help with debt recycling please . absolutely zero knowledge , so appreciate some guidance .

    My current situation:

    Bought PPOR in Jan 2020 , 650k by paying 5% deposit (95% LVR) , so incurred 27k LMI. Recently split the loan into 115K variable @3.84% and 500 fixed @ 2.29% for one year .

    115K variable has offset account , which has 80K cash .

    Business income come into Trust , from here i pay salary to my personal account . (Trust has my self as trustee and a bucket company) .
    From my personal account , i transfer the money into offset account.

    Planning to buy small investment property . I read Terry.w tax tips , my knowledge is less, so didn't understand fully .

    Loan 1 = 115K Varibale
    Loan 2 = 500 k Fixed
    Loan 1 Offset = 80K cash .

    So, if i understood correctly , i can pay loan 1 with 80K cash and later redraw from same loan 1 (to get tax advantage ).

    My question here is, redraw the money from loan 1 account into which account ? A fresh account to be created (easy to show to ATO that redraw money is for investment purpose) ? or existing loan 1 offset account ? if so , its bit confusing as , i am paying from offset account and redraw into same account ? more over personal savings are added to the same account , so this is mixed with too may transfers ?

    appreciate bit of guidance and direction here please...

    Thanks
    SuOz
     
  2. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Plus Member

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    See my tax tip 1
     
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  3. Jess Peletier

    Jess Peletier Mortgages, Finance & Property Strategy Aust Wide Business Member

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    A new account with no cash in it. It’s important that there’s no confusion about which funds are the re-borrowed funds, and which are your own cash.
     
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  4. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Plus Member

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    are there any tax implications?
     
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  5. Jess Peletier

    Jess Peletier Mortgages, Finance & Property Strategy Aust Wide Business Member

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    Entrapment ;)
     
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  6. SuOz

    SuOz Member

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    Thank you Terry
    Tax Tip 1: Parking borrowed money in an offset account
    Got the point ,
    "To avoid the risks of ruining deductability I suggest a better way to proceed would be to use an Interest Only loan where you can draw down the funds at settlement and put them straight back into the loan. The funds can then be reborrowed from the loan at the time of investing."

    Means in my case , pay the 80K to loan 1 , later create an investment loan (interest only) and use that towards the purchase of IP .

    Thanks
    Suoz
     
  7. SuOz

    SuOz Member

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    Thanks Jess , appreciate very much :)
     
  8. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Plus Member

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    Ideally you want to pay for the investment by directly transferring from the loan.
    You can park in the offset account and pay from there but there is no authority to say that this will not break the connection with the borrowings.
     
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