Maximising tax-deductible debt

Discussion in 'Accounting & Tax' started by Raymond Wu, 23rd May, 2020.

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  1. Raymond Wu

    Raymond Wu New Member

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    Hi all. I am planning to buy a PPOR soon and would be grateful for some clarification about how to maximise the tax-deductibility of my debt. My situation:

    Partner and I both have $500k loans on one IP each, both with $300k in the offset accounts.
    We were looking to buy a $1.5m PPOR, using 20% deposit and $1.2m home loan
    The $300k deposit for the PPOR purchase would be taken from our funds in the offset account.
    Could we move the remaining $300k we have in our IP offset accounts into the PPOR offset account, such that we are maximising the debt in the IP loans and minimizing non-deductible interest repayments for the PPOR loan?
    The IPs are currently P&I loans for a lower rate. Presumably it would be prudent to refinance the IPs to IO before purchasing the PPOR and have the PPOR as P&I if we wanted to reduce repayments for the next 5 years?

    I have read that the tax-deductibility of debt is determined by the purpose of that loan, which I assume would still refer to purchase of the IP to generate rental income, and therefore it would be tax-deductible? If not, what should the approach be to achieve this, given this? If this is not able to be advised over a forum, what professional should I be seeing about this? (Someone who is an accountant and tax agent?)

    Thanks for any advice you can provide!
     
  2. Terry_w

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

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    Get some tax advice, but you could
    a) borrow 105% for the new purchase
    b) bring your offset money across
    then
    c) debt recycle by paying down the non-deductible loan at owner occ rates - splitting the loans
    d) reborrow at owner occ rates and pay down the investment debt
    e) also borrow to pay the investment expenses
    f) consider whether to pay IO on the investments or PI with a loan rate - perhaps borrowing to pay the principal component.


    Deductibility depends on the use and not really the purpose. See my many tax tips on here.

    Only registered tax agents or solicitors can provide tax advice, accountants cannot unless they are either.
     
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  3. Raymond Wu

    Raymond Wu New Member

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    Thanks for the quick response! I think most of what you mentioned comes after my original question, but you have actually answered it in your Tax Tip 82: "Taking money from an offset account on an IP and Claiming Interest" - I.e. I can take the money from the IP offset to buy the new residence and the IP loan repayments is fully deductible. Presumably I can do the same in moving from IP offset to PPOR offset too.

    A few questions from your response:
    You mentioned the borrowing 105%, but is this only worthwhile for an investment loan rather than a PPOR/non-investment loan?
    "reborrow at owner occ rates and pay down the investment debt" - I take it this is only worthwhile once I have no further non-deductible debt on the PPOR loan as it makes sense to pay off that debt first?
    "Deductibility depends on the use and not really the purpose" - Unsure if moving money from the IP offset to the PPOR offset as soon as the non-investment loan is created changes the use?
     
  4. Terry_w

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

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    - Since OO rates are generally lower than investment rates it can pay to maximise this so borrowing 105% for OO properties can be a good strategy.

    - no, can be worthwhile doing the day after settlement.

    - it won't change the use of a loan unless the offset is containing borrowed money
     
  5. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    Hiya Raymond

    I assume you have plenty of Serviceability ?

    The equity scenario looks good.

    Whats your risk profile like investing in equities ? I dont mean now :) I mean once the markets find some floor .

    ta
    rolf
     
  6. ShireBoy

    ShireBoy Well-Known Member

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    Terry, do you have a tax tip on this point? This is to cycle/substitute the debt into a cheaper OO rate?
     
  7. Terry_w

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

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    Yes, i think it has 'shuffle' in the title, can't remember which one now.
    I do have a successful private ruling on it though
     
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  8. Raymond Wu

    Raymond Wu New Member

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    Yes, loan serviceability shouldn't be an issue at these amounts. I assume you ask about risk profile re: equities to consider the option of debt recycling? I'd be open to taking on moderate amount of risk/more variance if it meant maximising tax deductions and the median end outcome.

    Thanks for this suggestion. Am I right in saying that this allows to pay the lower of the two loan interest rates (owner occupier P&I vs investment IO), while still maintaining tax-deductibility of these loan repayments? I think this may be the thread you're referring to?
    Strategy: Borrow Against the Main Residence for an Investment Loan
     
  9. Terry_w

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

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    The loan shuffle strategy allows the higher interest rate loan to be reduced while maintaining deductibility.
     
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