Tax Tip 13: Simple Loan Structuring Strategy

Hi Terry,
I have got PPOR loan ($80k Variable + $182k PP + $65k equity loan fixed (for IP1)).I have offset account for $80k variable home loan. For IP2 I have $477k CBA + $33k Citibank. $33k Citibank was taken as unsecured personal loan for IP2 deposit with 7% fixed 2 years. Now after a month it will revert back to cash rate of 19%. Please correct me if my strategy is wrong. I should split my $80k variable loan into $33k + $47k. Pay down $33k from offset account and reborrow to settle $33k Citibank account. Am I correct to keep the deductibility of IP2?

 

Not sure i understand what you have written but you should not pay off the citibank loan with offsrt account money but borrow to repay it as this will be a refinance. Set up a new loan to do this so there is no mixing.

 

By doing this you are repaying non-deductible debt on your PPOR loan using your offset account funds. You will then reborrow from the newly created $33K split to refinance the Citibank loan. This $33k split should now be deductible as its purpose has changed from financing your PPOR to financing your IP. Check with your broker to make sure you can redraw the $33K after you have paid it down.

 

@Terry_w, what are the drawbacks if main residence is going to be rental in this strategy...

scenario: 220K PPOR loan linked with 220K offset balance. Planning to by new PPOR in next year and existing PPOR will become rental. 220K offset balance is saved to fund next PPOR deposit...

Considering this strategy, I get bank to split the existing 220K loan in 170K and 50K. Use my offset money to pay down 50K and redraw it back to invest in shares. interest on this 50K will be deductible as used for investment purposes. When I've enough growth in underlying shares will sell some of them to pay off the loan after paying CGT. keep following the same process in future to acquire more assets...

Assume during any of this time, existing PPOR becomes rental what are the drawbacks...if any?

 

S

In that case the loan would be deductible once the IP becomes rented out. So paying it down may not be the best idea. Instead you should be borrowing to buy the shares without paying down the loan.

If that is not possible because you have no equity then you have a choice to make - pay down and borrow to invest or to use cash to invest and later sell the shares and then reborrow against the new PPOR to buy more.

 

Terry, you'e lost me here. I get that once old PPOR becomes rental loan will be deductible. If i pay 50k down by selling shares, i can repeat the process again....can't i.....even if the underlying security has become income producing....

If above steps are used to invest in shares and if I sell the shares...am i not required to pay off that debt? I don't have enough equity hence thinking of using my offset savings to pay off the part PPOR loan and re borrow it for shares...

OR

rather than doing all this, i can wait buying my new PPOR set multiple splits on them, use my offset money to pay split off and use this strategy on new PPOR loan rather than playing with current loan which will become deductible in future....

 

If you buy the shares by paying down a property investment loan, or what will soon become an IP loan, then you are permantly paying off investment debt.

But if you wait till you buy the PPOR you would still have the same debt on the IP and lower non deductible debt on the PPOR.

 

Hi Terry,
First off thank you for your tax tips! I joined a while ago but forgot about the forum (life is busy). I came back and just started reading all your tax tips and I'm hooked
I'm quite heavily mortgaged on my PPOR @ about $600,000 so this debt recycling via split loan's has me interested and I'll do some more reading and make sure I speak to the right people.

I have a question that I don't think is covered here, and I am pretty sure the ATO would not allow it but I will ask anyway.

If you set up a split loan and pay off say, split A and use the funds to purchase an investment (shares). What is stopping you from later selling the shares and putting that money back into split B? This would leave split A maxed out for "investment" purposes and you've just used it to pay down non-deductible split B.

Obviously there would be some kind of rule against this? If not you could recycle through your debt quite fast.

 

Thanks for your comments Redchair.

Basic tax law would mean the interest is no longer deductible once the shares are sold - except if sold at a loss in some situations.

 

I thought that would be the case. Thanks Terry.
Continuing to read through your posts. Thanks for opening avenues for me to explore.

 

Hi Terry,

Firstly want to say a big thanks for all your posts. Very helpful for new investors like myself in such a complex field. I'm just re financing myself for my first investment property and am a little confused about how to go about thing.

Currently have $400k PI loan outstanding for PPOR. Property just valued at $520k.
Have just been approved for $70k LOC with $10k split to pay off pers debt. With the remaining $60k LOC the plan was to invest $20k in shares, leave $10k as a buffer and use the remaining $30k as a deposit for a property.

From what I've been reading this is a bad set up due to the money being used for separate purposes within the LOC (shares and property deposit) is this correct? Just curious on what way you would suggest to go from here.

Also with the $30k I have for the deposit. Should I use that soley for the deposit and borrow money needed for all other costs (LMI, Stamp Duty, Build and pest ect) or vice versa and pay for those with cash and use a less deposit out if the LOC.

Love the work mate I'm sure you've saved people $$$thousands with your advice. Much appreciated.

Cheers

 

Best to split the loans into the relevant purposes. separate for shares and separate for the IP deposit - but this can include other IP costs too

 

Thanks Daniel,
I am doing this now and requested ANZ to Split the loans $33K and $47K . I will transfer money from offset account to newly split $33K loan but I can't transfer the exact amount otherwise it will close the account overnight before redrawing from it. Any suggestions for that. As soon as redraw is available I will then transfer it directly to citibank.

 

You can pay the loan down to a very low balance and the pay it down. 99% or so may then be associated with the new borrowings.

I don't think you will be able to redraw from the loan directly with ANZ.

What you can do is set up a clean account, redraw into that account and then transfer it.

 

Thanks Terry, I am going leave $5 into the split account so that it wont closed and then redraw to new clean account and transfer it.

 

Just watch out for the timings of direct debits/credits

 

in another thread I posted this example for someone who wants to buy property for cash with no plans to invest just yet:

Colin suggested buy the property with a loan just in case they were to move out which I think is a good idea, But a 80% IO loan fully offset may not be the ideal structure. this is because if the loan is paid down and drawn out it would be a mixed purpose loan.

So one way to structure this to save tax, fees and get flexibility is to have multiple splits

e.g. if the property price is $500,000 and 80% is $400,000 then perhaps structure like this
A $100,000
B $100,000
C $100,000
D $50,000
E $50,000

All with own offset accounts and all fully offset.

The client sits tight for a while and then decides to invest $50,000 into shares. They simply pay $50,000 into loan E and borow $50,000 to invest. Now the interest on loan E is fully deductible (assuming income producing shares) and
1. there was no need for new loan applications and
2. no need to deal with mixing and
3. no need to change loan type.

(you just have to find a lender who will allow for multiple offsets!)

 

I think NAB does that from memory but separate fees for each split....they don't have so call package fees...

 

Hi All, if I have 1 owner occupied home worth say $1m (loan $500k), and 1 investment property worth $700k (loan $400k). I am looking at refinancing. During this process, will it be ok for me to restructure it to increase the loan for my IP (say to $600k or even higher?) and reduce the loan for my home?

Thanks!

 

It would be ok, but will result in adverse tax issues.

Why?