Investing and spousal tax strategy / questions

Discussion in 'Share Investing Strategies, Theories & Education' started by barduck, 15th Oct, 2018.

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  1. barduck

    barduck Member

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    20th Sep, 2018
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    Location:
    Perth
    Hi all,

    Am looking to get some advice on a hypothetical investment strategy that i've been pondering over. It's probably not something unique or innovative, and i'm sure its been done before, but would really appreciate your thoughts / insights.

    Strategy overview:

    Me: 37% tax bracket.
    Wife: 0% tax bracket (housewife - 0 dollar income a year currently)

    1) Take out a line of credit under both of our names - this is to increase serviceability as wife doesn't have an income.
    2) Use line of credit to buy high franking dividend yielding equities (e.g. individual blue chip stocks, etfs, lics) - this is to take advantage of high franking credits for wife's tax bracket - giving a 8-10% gross yield in some cases where dividend yields are between 5-7%
    3) If gross total income of wife's dividends is over the tax-free threshold - deduct the interest to bring her taxable income back into the tax-free threshold. Also use excess to reinvest into either paying down the PPOR debt (seperate to this), or buy some high growth, low dividend yield international etfs.

    Assumptions:

    1) From my calculations, the franking credit received is providing a 30% tax benefit in terms of yield taking into account total capital invested. I assumed that if I was to have the shares in my name, that I'd be worse off in yield. Also, deductibility wise, the negetive gearing benefit of having it under my name, didn't seem appealing as it would require a loan interest of around 75000+ (which is way higher than i can afford!) per year (thats not even counting the dividend income) to reduce my tax to recieve the same benefit.

    Questions:

    1) Is the interest on the LOC 100% deductible even though it is under both our names. I remember reading on the forums that the owner of the asset is the person that can claim the deductions (something about a previous ato ruling), so this should be the case, however I wasn't sure if this applies to lines of credit?

    2) If the deduction of the loan interest is large enough to cause the wife to fall below the tax free threshold, would she pay zero capital gains tax, if the shares are sold at a future date?

    Once again really appreciate your help on the questions above. Apologies if this has been asked before, just really interested to hear how this stuff works also

    Cheers!
     
  2. Pleep

    Pleep Well-Known Member

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    This withdrawn ATO ID below refers to you to the two Taxation Rulings that cover it off - also listed below.

    I can’t offer advice other than to say I interpreted that a loan can be in joint names but fully deductible in one name if against the income from it is in that one name. It’s been discussed around PC forum before with lots of “not advice” disclaimers ;)

    However you won’t be able to pick and choose the level of interest deductions for your spouse. If $50k loan used to buy shares in spouse name, then ALL interest on that must be matched against ALL income.
    If you are not experienced or confident you should get advice. There’s all sort of other structures that can be better if you’re in this for the long haul.
    Also capital gains tax will be calculated in your spouses name when/if you sell. The interest is deductible against the dividend income each year but not cumulatively against a cap gain... perhaps I’ve misread your question?

    Withdrawn ID
    ATO ID 2002/363 (Withdrawn) - Is the taxpayer is entitled to claim the full amount of the interest paid on a mortgage for a rental property under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) when listed on the title deed as the sole owner, but the mortgage is held in joint names with the taxpayer's spouse?

    Taxation Rulings
    TR 95/33 - Income tax: subsection 51(1) - relevance of subjective purpose, motive or intention in determining the deductibility of losses and outgoings (Published on 4 October 1995)
    TR 93/32 - Income tax: rental property - division of net income or loss between co-owners (Published on 7 October 1993)
     
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  3. Terry_w

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

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    I have written about this strategy on here several times.

    1. Wife would be owner of investment so she would claim the interest.

    2. CGT will depend on her income for the year.
     
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  4. barduck

    barduck Member

    Joined:
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    Perth
     
  5. barduck

    barduck Member

    Joined:
    20th Sep, 2018
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    Location:
    Perth
    Thanks both for the reply.

    So if im understanding correctly, lets say in a hypothetical scenario

    $500k worth of dividend shares - 6.5% gross yield
    Producing $32500 dollars of income per year with imputation amount added in
    Deduct loan interest - 20000 dollars

    taxable income = 5000 dollars

    So effectively 0% tax bracket.

    Say the following year, the shares appreciate to 600000, still in the same tax bucket from dividend perspective, but the shares are sold at 100k.. is the tax on the 100k taxed at 0% CGT?

    Once again thanks all for the kind help
     
  6. Terry_w

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

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    No.

    Her taxable income would be $50k assuming held longer than 12 months.

    Plus any dividend income
     
  7. barduck

    barduck Member

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    Darn! okay, thought that might be too good to be true :)

    Thanks so much for the help. Now understand this stuff finally
     
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