Tax Tip 13: Simple Loan Structuring Strategy

Tax Tip: Simple Loan Structuring Strategy which is Tax Effective


These days it is getting very difficult, for some, to restructure loans down the track. This may be due to serviceability reasons. e.g you get a loan for a $500,000 and pay it down to $400,000 and then want to set up a LOC secured against the property - may not be possible because your situation may have changed or because of the hardening up of the lender’s serviceability criteria.


So plan from the start, especially with non deductible debt.


With a PPOR loan of $500,000 you could simply split the loan into 5 or so splits such as:

$50,000 Split A

$50,000 Split B

$50,000 Split C

$50,000 Split D

$300,000 Split E


The splits can be adjusted to suit you needs. The smaller the splits the quicker you can start investing without creating a mixed loan though. I have just done one with $25k splits.


This way you can concentrate on paying down Split A first and once this has be achieved, don’t close this loan, but use it to invest. Borrow to invest and then implement a debt recycling strategy such as outlined at Tax Tip 2: Debt Recycling https://propertychat.com.au/community/threads/tax-tip-2-debt-recycling.1472/


This can help you pay off Split B faster which can be used to invest further.


Also consider combining it with Tax Tip 4: Borrowing to Pay investment expenses https://propertychat.com.au/community/threads/tax-tip-4-borrowing-to-pay-investment-expenses.1554/


Consider using Interest Only loans for all the loan splits and set up the offset attached to Split A first and don’t pay the loan down but put the extra money into the offset and then when you want to invest ideally you would not pay the loan down, but borrow first.


Only where further borrowings are no possible should you start to use the money - but you must first pay down the loan and reborrow. Tax Tip 9: Don’t use Cash in Offset account to Invest https://propertychat.com.au/communi...nt-use-cash-in-offset-account-to-invest.2355/


Where you are wanting to invest in shares you should seek financial advice as only a financial planner can advise on this. Where you are wanting to invest in property anyone can advise on this currently. But since there is a tax side to this you need to speak to your tax adviser about deductibility of interest etc.

 

This strategy is even more effective now as many lenders are starting to charge harder rates for investment loans and LOCs. Start off with the splits in place, pay down splits and reborrow - all on the home loan rates.

 

I have trouble following all of these.

I have a $700k PPOR mortgage that I have paid off to about $250k (redraw of about $450k available) and I have $150k in cash in hand. I intend to use these money to buy investment properties.

So if I buy a $800k IP and use around $250k from the redraw + cash in hand for deposit and settlement then this amount is not tax deductible. Are you saying that I could have made this amount tax deductible by using splits ?

 

If you redraw an amount and use it to invest the interest will be deductible, but you will have a mixed loan so you will be paying down deductible debt with every subsequent deposit. Simply split the loan first and you can pay down the non deductible debt independantly of hte deduction.

Don't use cash to invest either as you will end up paying more non deductible interest and have less dedudctions.

 

Hey Terry,

So just to clarify, the reason for doing this is because its harder to refinance (split the loans etc) later down the track?

^ So you'd fully pay off split A (which is non-deductible debt). Then I get confused on the next part, how do you use it to invest? Drawing down on that loan? And because you have fully paid it off, and the amount is drawn down for investment purposes, the loan is not contaminated and fully tax deductible?

 

Fitzy - yes you could do this in normal circumstances and even more important now that it is harder to get finance.

That is the idea, pay off one split and then use redraw to invest. Because it is a separate split and will be paid off no contamination will occur.

 

Is it possible to split an existing loan without refinancing?

 

Not really. A refinance is where an existing loan is changed in any way. (RE finance) Many investors seek refinance to obtain equity release so they can access more $ for a new IP deposit covering the deposit etc. Then they draw 80% on the new IP.

 

Hi Terry,

Do you know which bank can offer this kind split Loans? The issue is I can't find any bank can offer a card that is attached to LOC investment split as you mentioned it has to be directly.

A lot of bank will need you to transfer from LOC split account to a saving account then spend on the saving account. Please advise.

 

Most banks will allow a loan to be structured as I described. I just set one up for a client like above with ANZ.
Credit cards are not really attached to the LOC but separate.

I don't know any bank that requires money to be transferred from a LOC to a savinngs account.

 

Let's say I have $100,000 in my LOC loan account and I want to use this to pay a deposit of a investment property $60,000.

Do I need to go the the bank and make a bank cheque of $60,000 directly from that LOC loan account ? or the bank should give me a cheque book that is linked to the LOC loan so I can pay the deposit directly.

Otherwise, I have to internet transfer funds from the LOC account to normal saving account then make a cheque. Please advise.

 

You should just make sure it goes directly from the Loc without detour. So any of
1. Cheque from loc açount
2. Bank cheque.
3. Internet transfer

 

Thanks Terry. Your tips are always pointing me to the right direction.

 

Hi Terry,

I understand pay down the split part but don't understand the reborrow part. So in your eg. You have pay down split A , what do you do next? Thanks

 

You then borrow to invest - without contaminating or mixing the loans. You can also implement a debt recycling strategy.

 

I guess you mean pay down split A then apply for LOC loan from the bank with the same amount in split A then use the amount in LOC loan for investment ? Thanks.

 

Not really. That is one way. But

This strategy is to avoid having to apply for new loans. The loans are already split so you just have to use redraw to take the money to invest.

 

So if you pay split A down from $50,000 to $0, then you redraw that $50,000 to pay an investment property deposit ? So the interests occured from the day you paid the deposit will be tax deductible?

Or if you have a offset account linked to split A, you put $50,000 in the offset account which is 109% offset. Then you can start using the $50,000 in the offset account for investment purpose? So the interests occurred can be deductible?

 

Yes to the first.

If you use cash from offset to invest the interest would not be deductible if the loan is owner occ

 

I just did one. My PPOR loan was split into 2.