Logistics of Debt Recycling

I currently have a PPOR debt of $950k and I've checked with my bank (Firstmac) who allow me to split loans for a fee of only $100 per application which seems reasonable. (I can apply for 3 or 4 splits in one application and it would be $100 total - but would try keep only one split to keep things simple). I can also do loan limit adjustments (4 per year free, then $50 each).

My plan moving forward is to debt recycle to buy shares and IPs.

My question is around the logistics of how I do it to ensure the newly split loan/s are deductible and I'm not jeopardising that.

Say for eg I currently have:
PPOR loan $950k
Cash in offset $80k

Could I do the following:
- Split PPOR loan into $750k (non-deductible) and $200k (to be used for investment only)
- Transfer say $50k cash into $200k loan. Withdraw/redraw it the following day to lend to my trust which buys shares/property
- In 1 month, I receive say $100k from selling a property. $100k goes into $200k loan, then next day loaned to trust to invest
- 1 month later, $50k savings go into $200k loan and then loaned to trust to invest
(I'm now maxing out my $200k loan)
- Apply to increase $200k split to $300k
- Transfer another $100k savings into the split loan over a few separate transactions and redraw to loan to investment trust (now $300k fully maxed)
- Keep increasing limit until the whole loan is deductible

I'm guessing the above is OK assuming when funds are withdrawn from the split loan, they are only used for investment purposes/loaned to trust for investment purposes (interest to be paid on loan to trust).

Am I missing anything?

 

what does your tax adviser say?

If you do it that way you would have a mixed $200k loan and you would be reducing deductible debt. You would need to pay the whole split down in one hit to avoid this.

If you are the trustee of 'your' trust you cannot lend to yourself at law.

 

I currently have a PPOR debt of $950k ..

That doesnt mean its deductible does it?

 

Ahh I see what you mean. When I'm only paying down part of a split, the remaining portion is non deductible still. So I'd have to create a split of say $50k, pay it down in full then lend to trust. Then for the next $100k I'd have to create a new split loan, pay it down in full then lend to trust. Etc etc. So I'd end up with multiple splits but I guess when I refinance I could combine the deductible splits into one split.

New trust set up has corporate trustee

 

You really only need perhaps 3 splits
You can combine them once used.
So one for the main non-deductible, one for the ivnestment split, one for the new investment split
then combine the investments and add a new investment split
then combine
etc
otherwise you could end up with 100 splits after a few years.

 

Thanks Terry, makes sense.

 

Okay, last question (for now).

Makes sense that you have to pay down the split in one go. But you don't have to redraw it out of the account in one go, right?

So I could create a $50k split, pay it down in full in one go, then withdraw $10k at a time to loan to my investment trust?

 

Yes that is right, It is like using a LOC in stages

 

What is the outcome if you set up a single split but it's a LOC but you keep increasing the limit over time as more funds become available?
Would this work at all?

 

Agree nobody wants 100 splits but always understand that if ANY property use changes (ie Ip stops being a IP, or a sale etc) then you may need to resplit that loan out prior to that event.