Tax Tip 13: Simple Loan Structuring Strategy

Agree. A partnership is very limiting. A unit trust and several other options need consideration. And legal advice would be a good start

I would suggest using someone like terry as he can sort the loans and structure issues.

 

Hi Terry,
The information you have posted on splitting loans to debt-recycle is life changing stuff, and we'll definitely be doing it in the next month or so for a new home. I'm just thinking a bit more specifically about how the offset account works, since we will be storing an emergency fund, retirement fund, life savings etc in it, and using that to reduce our interest payable on the whole loan.

Will the offset account only offset the interest for one split at a time? For example, our first split may be 25k, which slowly reduces through P&I payments while we accumulate 40k in the offset account. By that point the 25k debt might be down to 20k, which we would pay off from the offset, allowing us to then reborrow deductible investment debt from the first split. We would then still have 20k of savings in the offset account, which we're not willing to pour into the next split since we might need it for emergencies/other expenses. We would probably wait for it to go up to 40k again if that makes sense. Is there a more efficient way to do this?

 

An offset can only offset one loan at a time. Where you have multiple split loans and more money than one of the split amounts you might want to have 2 or more splits.

I would probably put the offset account attached to the split you are intending to pay down and reborrow from.

You also have to be very careful about borrow money and parking in offset accounts as this can contaminate the loan. See my tax tip 1

 

Maybe the loan can be set up so that there is an offset account for every split. Hopefully most institutions would allow this? And I definitely understand tax tip 1. If I redraw money from a paid-off split, it goes directly into the shares account.

 

Depends on the lender. You would generally only need 1 offset, perhaps 2 depending.

 

Many lenders permit multiple offsets v's multiple loans...and then charge multiple fees. One aspect of a offset is they cant make any $$$ other than charging a fee. Ask about fees.

 

So if you have two offset accounts, there is a mechanism on internet banking to adjust which split each account links to?

I have another tax question which has dawned on me today about our investment property. I hope this is ok. We have just applied (through a broker) to have our investment home loan refinanced through ANZ as an equity release so we will have more funds to use as a deposit for a residential home (which we haven't found yet). This means that our original loan of $142k becomes $248k P&I (investment unit valued at $310k) and it sounds as if they are going to park the extra $106k in an associated offset account for us to access as we need. Combined with our savings this means we can afford a 20% deposit on a home within our budget.

My question is will the interest paid on the $248k be tax deductible no matter what, since it's an "investment loan"? Or, since $106k won't actually be used for investment purposes will we only be able to claim a deduction on 57% of the interest? If the latter is true, then we should probably try not to use the entire $106k on the house if possible, and maybe even spend a remainder on shares, which means we need to be careful about withdrawing it all at once and "contaminating" the funds for later use.

Sorry for the extra questions. Last week I would have been too dumb to even think to ask, but it's only through reading this forum that I've started to think more about tax efficiency.

 

you should hold off and seek some tax advice.

if you do what you propose the interest won't be deductible and you will be creating a mixed purpose loan making further complications. Don't increase but split and get a new loan - interest won't be deductible but you can avoid a mess.

If it is an equity loan they won't require draw down at settlement but you can use this later. Best to convert it to a term PI loan as soon as you use it to save interest.

 

I think you're a life saver. I just contacted the broker and he will make sure the loan is split tomorrow. I think it gets finalised in 2-3 days.

 

Wonder how many people out there are getting it wrong - i think maybe 50% are clearly stucture impaired and a lesser % have more minor issues but most are doing it wrong.

 

Excellent post Terry. Maybe be a bit complicated for some...?
I did this few years ago, had many splits, some lent to SMSF, some other trusts, some to a kid for investing, some personal. It came very useful as government then changed the 'safe harbour rules' for SMSF, hence my SMSF 105% loans needed to be split to 70% and 35%. The 35% then became as NCC (Non Concessional Contributions).
These were then paid off personally - as it was non-deductible debt (not fully as it would close these loans off), hence now I can re-use them for personal or any other entity investing.
I am so glad my broker advised of this strategy and the lawyer altered LRBA's and hence now I can have this as a buffer or for further investing....

 

It can't get much simpler than this can it!

 

You should saving into the offset account and then pay down the loan, almost completely, before reborrowing.

 

Unsure where to ask. We have 3 seperate house loans (2 properties) and 2 car loans.



1) PPOR: $436k owing (redraw: $11.6k, offset: $100k approx)

2) Investment can't claim: $155k owing (small redraw)

3) Same invest. Taxman approved: $45k owing.

Both car loans paid within 15 months, not worried.

Would it be wise to 100% pay off the non-deduct portion of loan 2, once we have $155k+ in offset account? I know that ppor should be the 1st to pay down, but less loans = more payments into offset account each payday.

Difference in interest charged:

1) between $1,090 & $1,184 over 6 months.
2) $488 - $508
3) $140 - $146 (mr taxman)

I see an extra $500 ish each month for the ppor, when the 2nd loan is closed.

Am I making any sense?

 

How does the offset go from $100k to $155k if you use it to pay off a loan?

Why isn't the interest deductible on the $155k investment loan?

 

- 99% of household wages / other income goes into offset. Pay cc's in full each month.

We would transfer the offset balance (loan 1) into loan 2 so we have one less house debt / more borrowing power for another investment.

Current income is around $7000+ per month in the bank. So the offset should soon be +$55k.

- Was our old ppor. Used it (when $55k owing) to help get our current ppor, turning old house into rental nearly 3 yrs ago. (Changed banks once in those 3 yrs).

 

If I have understood you correctly both loans (the first 2) relate to the purchase of the main residence so not deducitble. You might be better off paying the second one off first because that may have a higher interest rate being an 'investment' loan. Also you could potentially avoid having a mixed purpose loan if you can pay it out in full - or almost so as not to close it.

You could then redraw and borrow to invest.

 

Hi Terry,

Thanks for your posts. All very informative. Regarding split loans, does it mean that technically they are never really paid off?

Say for example I have a PPOR loan of 500k and split into 5 equal parts of 100k each, when it comes time to redraw from the 1st split loan for an investment, the 1st split loan of 100k is still secured against PPOR...so it means that the loan is technically never paid off rendering PPOR loan is never fully paid off?

I understand that this strategy is to pay off non-deductible debt and I can see how this would work. However, just for a 'peace of mind' perspective I suppose, how we can then get around the security issue

Thanks

 

It depends.
You would certainly first want to pay off the non deductible debt and then you could start paying off the deductible debt if that is your strategy. But it is likely that other investment loans would have a higher rate. The other option is just using offset accounts and paying minimum.