Strategy: Using AMP’s Master Facility to Debt Recycle

Discussion in 'Loans & Mortgage Brokers' started by Terry_w, 14th Jan, 2017.

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  1. Terry_w

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

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    Good point Rolf, but with shares the tax benefit might not tip it over to positive cashflow, unless perhaps the calculations do not take into account franking credits. But with property there are often non-cash tax deductions which can make a negative geared property cash flow positive.
     
  2. PeterW

    PeterW Well-Known Member

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    Terry, under the master limit, when you change the structure of your loans e.g. you create a new split, you switch a loan from P&I to IO - is a re-assessment process required? A financial planner told me that it is now. And that would seem to take away the main benefit.
     
  3. Terry_w

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

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    I have seen no announcement of this and have had clients restructure recently. A payslip was needed to confirm they were still working, but no assessment was made.
     
  4. Terry_w

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

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    Just confirmed with AMP that no reassessment is require for facilities were applied for after 21/06/2016
     
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  5. ChrisP73

    ChrisP73 Well-Known Member

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    Is Section 7 of the master limit restructure request form required to be completed though? In particular full financial details and monthly living expenses?
     
  6. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    As an aside...........

    master Limit is all assessed at IO at application for the chosen period of 5 or 10 years, regardless if the loans are mainly PI or not.

    this is why master limit servicing at AMP can be a fair bit lower than other lenders.

    BUT the flex of the AMP product for someone doing Active DR is hard to beat

    ta

    rolf
     
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  7. Terry_w

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

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    yes
     
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  8. Travel4Food$

    Travel4Food$ Active Member

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    I have $30k debt in a PPOR, probably not worth debt recycling? I'm looking to pay that off in 3 months.

    I have another property on IO, I can just pay the minimum IO amount and use the rest of my cash to invest in shares. Is there another way better than this so I can max out my deductible interest?
     
  9. Terry_w

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

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    Get some tax advice as well as legal advice as there are many different strategies you could employ.

    You can still debt recycle even without having any non-deductible debt. You can also debt shuffle if you have redraw = borrowing at owner occupied rates for investment use.
     
  10. hydroboy

    hydroboy Member

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    I'm trying to understand this specific part of the explanation.

    X sells sells the $20k cost base shares for $25k
    X pays $1k CGT
    X puts $20k straight back onto loan B and $4k into offset

    If we assume X wants to maximise good debt...

    X puts $4k from offset into loan, changes splits to give $24k split and then redraws the $24k to invest and restart the cycle.

    Prior to sell / buy operation X has 25k worth of shares, 20k deductible debt
    After sell / buy operation X has 24k worth of shares, 24k deductible debt

    Is that correct?
     
  11. Terry_w

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

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    Yep
     
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  12. hydroboy

    hydroboy Member

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    Thanks Terry, so assume X is paying 3.5% interest and dividend + franking yield is 8%, X has an additional deduction of 3.5%*4000 = $140PA but reduced their yield by 8%*1000 = $80PA putting them $60 ahead PA and "prepaying" some of the CGT should they ever sell the shares...
     
  13. Terry_w

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

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    I won't verify your numbers as correct but they should be ahead if they sold as a profit but by paying CGT are are reducing their capital earning dividends so perhaps some financial advice should be sought and modelling on which is best.
     
  14. BPhil

    BPhil Well-Known Member

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    They also reduce interest payments on the investment loan by rate*$1000 p.a. in this example (as loan is now $1k less)
     
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  15. hydroboy

    hydroboy Member

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    I don't follow...?

    Loan is the same isn't it?
     
  16. BPhil

    BPhil Well-Known Member

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    Initial:
    25k shares, 20k investment loan, X+4 k ppor loan.

    Subsequent:
    24k shares, 24k investment loan, X k ppor loan

    Hmmm yep you're right.

    So net is:
    Less divs (1k * yield)
    4k debt becomes deductible (mtr * rate * 4)
     
  17. wilso8948

    wilso8948 Well-Known Member

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    Mind elaborating on this point @Terry_w with an example?
     
  18. Terry_w

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

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    There are a few examples that come to mind
    a) property held by a spouse on a lower taxable income
    - paying this one off faster than the other held by the other spouse will help tax deductions

    b) property held by a trust

    c) planning on moving into an investment property
     
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  19. BPhil

    BPhil Well-Known Member

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    Thought about this a bit more @hydroboy @Terry_w

    Even though you can come out ahead from an income tax perspective, your net worth drops by much more (due to the CGT).

    I think this strategy can only be recommended in limited circumstances:

    1. Market timing (yuck)

    2. Paying down the mortgage faster (sounds good, but net worth is decreasing in this strategy!... Could be appealing for someone anticipating cash flow difficulties so want to ditch their principal obligations)

    3. Avoiding later large lump of CGT on sale (for me, yuck, I will never sell).
     
  20. Terry_w

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

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    Yes that is a legitimate consideration @BPhil

    I don't advise clients on whether to sell assets or not, just the tax and legal aspects but consider this.
    a) CGT will be payable eventually at some point, and
    b) the compounding interest saving on debt recycling non-deductible debt - which is tax free.

    But selling will result in less capital going forward which means less compounding.

    A financial planner could possibly model something like this for someone contemplating this strategy.

    Where shares are held by a trustee of a discretionary trust the tax would be easier to manage though. And this strategy could only be used until the non-deductible debt is paid off.
     
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