Tax Tip 13: Simple Loan Structuring Strategy

OK, I found a comment from this thread that resonated with me:
Debt recycling loan details

KISS principle, $50k split and claim 99.9% of interest means $50 buffer ($49950 deposited)

At tax time 99.9% is a pretty easy calculation to keep it as simple as possible.

Thanks for your help!

 

Hi Terry, this is a fantastic thread and all the others you have posted.
I am completely new at this and about to refinance my PPOR. just trying to wrap my head around how to structure my loan and how all this works.
Can you please give some basic guidance if the below seems logical.

I have PPOR of $650K value and loan owning of $250K.
I have also have $250K sitting in the offset. So following your tax tip #9, I don’t want to use the cash to invest directly.

My goal is to refinance the loan, to use the equity to buy 1 X IP and also to debt recycle the rest of the PPOR loan to buy income shares. I plan to buy shares in 5 x $50K buckets.

so, my new loans splits would look like below.

- Split A - $310K, IO, for IP deposit. Will get a new loan for this. Does this new loan get an offset too ?
- Split B - $50K, IO, with offset
- Split C, to F, each of $50K, with offset.

I then have my current offset funds parked against each of the $50K splits from B to F.

To debt recycle, I pay down the individual splits with corresponding offsets and the redraw (after a week or so) and transfer money directly into a brokerage accounts and buy shares.
The income from the shares goes back where ? Does it go back into the individual offsets to completely pay down my PPOR loan?


or have I completely got this wrong? And there is a better way of doing this.
Any guidance would be much appreciated.

 

I wouldn't do it like that. Best to get specific tax and credit advice.

 

Hi Terry, this is what I got back from the credit advice.

Step 1 - Refinance the PPOR Loan and split equity

Loan A - $250K, PPOR , Offset: $250K
Loan B - $270K, equity releases from refinancing the PPOR

Step 2 - pay down PPOR using offset and split again. Use this to buy shares

Loan A - $0.0. PPOR , Offset: $0.0
Loan B - $270K, equity PPOR
Loan C - $250K, use to buy shares

Step 3 - Buy IP using Loan B for deposit and other costs and split left over again

Loan A - $0.0. PPOR , Offset: $0.0
Loan B - $150K, deposit and costs for IP
Loan C - $250K, for shares
Loan D - $520K for IP
Loan E - $120K, available for another IP deposit or more shares


Pros, are that it reduces to non-deductible debt to 0 and allows me to diverse investments into shares and property.8
Cons, if I want to convert my PPOR into an IP, in the future there is no non deductible debt.

What do you think of this structure. I am still awaiting tax advise on it.
I know you are not taking new clients. Does that include tax advice ?

 

I am reluctant to give advice like this over the forum without knowing all the details.

Keep an eye on my signature if you want to become a client.

 

There is no structure.
The present markets are evident that shares can fall but debt wont. Share income must be impacted. What ensures you can service debt if income stops and shares fail to produce income ?

If you use equity in a home to borrow and then use that borrowing to repay the debt how does that work ? Its like drawing cash on your card to pay off the card. It seems a futile exercise and I cant see an deductible purpose.

 

I had a few questions more about the process with what happens post paying down the split and redrawing the funds.

1: After paying down the split A in this example from your offset, when you redraw the amount to use for a deposit on an Investment property, would the funds be located in a separate account and your broker would just look for the most appropriate loan product for the investment ? And you would use the funds as if it was a cash deposit ?

2: Would that split you just used to pay the deposit on the next property, would it return to principle an interest ? Or would you attempt to make it interest only to continue to try and pay down the other non-deductible splits quicker ? I'd assume more hoops would be needed to jump through to do this ?

3: Is it possible to have IO against PPOR if disciplined and trying to execute this strategy ? Having all income in the offset, building the cash up, paying down splits when needed, investing, then moving onto next split and repeating ? Would it be more efficient like that if possible ?

Any answers would be appreciated

 

1. You would use the redrawn loan proceeds to directly invest. This might involve paying a deposit.

2. PI or IO would continue as before redrawn

3. Yes - but difficult to find a lender at OO rates

Seek tax and credit advice.

 

Hi Paul,
I have a stable job (I work in the healthcare industry) and our family expenditure is below our net income. So we have the cashflow to service the loans, just.

So are not dependent upon the shares dividend income stream and can absorb the costs.

With the IP, I am a bit nervous because of the status of the rental market. We can absorb no rent for 6 months by dipping into our emergency fund. But i am going to defer buying an IP for a while and not taken on unnecessary risks. The property market should fall over this time anyway.

Essentially, I have a bit of equity / cash right now and trying to find the most effective way of investing it for the future. I reached out to a financial planner, who quoted me $6K, for a SOA.
That was the end of that conversation.

So trying to learn on here

 

I didn’t quite understand this bit. Still learning.
Essentially, I have $250K in offset, $250K loan owning on PPOR, and a PPOR value of $650K.
I want to borrow the equity in the PPOR to buys shares, put a deposit on IP.
Also use the $250K in the offset to pay down the PPOR and also then redraw the money to buy more shares.
What would be the best way of doing this ?

 

You would
a) increase the loan, under a new split
b) use this to invest, without the money taking a detour

and/or

a) pay off the $250k loan, without closing it
b) reborrow this, using redraw, and invest the money without taking a detour

If the borrower and the investor are the same and the investment produces income the interest should be deductible.

 

The and scenario is what I plan to do. Though for some reason a number of people who I have spoken with don’t get this scenario.

Can the loan be on 2 names - me and my wife , while the asset be only one name ? Either mine or. My wife’s depending on the tax advantages ?

 

See
Tax Tip 79: Interest Deductibility for 1 on title 2 on loans Tax Tip 79: Interest Deductibility for 1 on title 2 on loans

 

Are they tax agents or tax lawyers? If not does it matter that they don't get it?

 

If I have an equity loan (io) separate from ppor loan can I transfer to my trading account to settle shares then pay off the equity loan with cash and repeat. Or do I settle the shares directly from the equity loan to be deductible.

 

You could do that but should consider the tax consequences of doing so

 

What are the tax consequences?

 

Keep reading and seek advice.

 

Sorry Team, a silly question no doubt... Can someone please tell me exactly how you do this??

Do you pay split A down to $0??
What is the term used for the redraw/ top-up function thereafter?

"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"

 

redraw