question on debt recylcing

Hi All,

I have a few questions around the strategy of debt recycling when using shares. I have a LOC which is interest only for the life of my mortgage (so another 27 years) and my plan is a little different to what others might be doing

1. using the dividends to help cover the cost of servicing the LOC loan.
2. selling the shares each year to release the capital gains and paying down mortgage debt
3. tax refund into mortgage debt

I guess I was curious around how others are doing point 2.

As an example, say you hold an ETF like VAS, are you simply selling the entire amount. Lets say you invested 100k and over the year you are sitting on a capital gain of about 5k, so a total of 105k.

1. Do you sell the entire 105k, and then transfer 5k into the mortgage account? or are you just selling the 5k profit? Selling the profit makes sense, but that confuses me from a tax standpoint.

2.Are you buying back the same day?

3. Is anyone using a wholesale fund over an ETF? The idea of buying small amounts regularly is attractive, however would make selling the gains almost impossible/impracticable. Would be keen to hear thoughts on that.

 

If you sell the 5k in shares you will make a taxable profit - in your situation however the profit is slightly under 5% of your net sale proceeds. You will then potentially enjoy the cgt discount.

Consider using an offset account against a private debt for your sale proceeds (after paying back the debt on capital) and then making a fresh loan for the new purchase.

If you sell the full 105k you can allocate the 5k to your offset. And the 5k is taxable (less discount maybe).

Remember that the share market fell 53% (ish) in 2007. Beware of fees and costs from product advisors.

 

I think most people won't sell, but it is a great way to speed up debt recycling I think,

 

how much do you get from the dividends?

 

Thanks.

I am surprised that people would not sell. I guess they have alot of cash flow to be able to pay for the loan without requiring to use dividends to pay for it.

My LOC loan is 5.14% and this year I made (strangely) 5.14% from VAS in dividends. So paid for itself, and now I just sell the capital down each year I guess.

Would still be interested to hear if anyone uses this strategy with a wholesale fund. Investing in smaller parcels is what I am after, but not sure how the technicals work. i.e if i sell all shares, can i simply buy more

 

would a wrap account work better if buying and selling alot?

 

I am not sure but I would think a same day wash trade using the proceeds to change the ratio of deductable to non-deductable debt looks very much like a scheme with the dominant purpose being tax reduction.

In the event of an audit how would you explain to the ATO why you made that trade? Perhaps you could buy back IOZ to allow you to argue some other purpose? Not happy with Vanguard maybe?

 

I think the main issue with wash sales are people selling with a loss to offset gains incurred elsewhere. Selling and realising a gain and buying back again is more of a legitimate strategy as it creates income which means taxes are payable. There is no avoiding tax if there is more payable so probably unlikely that Part IVA would apply. See TR 2008/1.

 

Ok, thanks Terry makes sense, you are making a pretty sizable contribution to the ATO in the form of CGT!

So does this strategy really stack up then? Say you were on top tax bracket. You put $100k in to the market, you do super well and sell 12 months later for $200k. You make $100k and pay $25k CG tax. You reduce your non-deductable debt by $75k, redraw and reinvest. You are now getting tax deductions on $75k worth of interest, maybe get a $2k tax refund, but you have lost $25k worth of shares no longer growing/paying dividends. What am I missing here?

 

Yes, lower capital base, but high deductions.
Also the shares could change price between selling and reborrowing.

It could also allow for easy restructuring with the new buying being a different entity.