Tax Tip 2: Debt Recycling

if you are able to get income or capital gains or both then you can debt recycle.

 

I know this is an old thread, and I’ve seen the answer I’m looking for previously in one of these but haven’t been able to find it.

going off the quote above, if I were to create a split to buy non income producing shares, for a growth strategy, would the interest accrued be deductible on sale of the shares?

 

If there is no expectation of income then the interest cannot be deductible under s8-1

But, if you can't claim interest you can take it into account when calculating CGT.

 

Thank you

 

Hi all,

We have a loan with an offset for our PPOR with Bank of Melbourne (yet to determine if they can split). I am looking at buying a business and want to use equity in the home (as opposed to applying for a business loan where the process is a bit more tedious and rates higher). BOM do say redraws over $30,000 need to be approved which may make this strategy void if they request details on the purpose of the redraw.

The potential business will be in a family trust. I intend to get a lawyer to prepare a loan agreement between individuals and trustee. A small margin will be charged to hopefully argue that the individuals will be receiving an assessable return on the monies loaned to the trustee, albeit minimal, hence everything is deductible - or can you just on-loan at the bank rate and be tax neutral for the individuals without issues for individuals and trustee?

Thoughts?

 

That is something for you to get specific advice on, but I asked the ATO this question in a private ruling and no profit was needed for that specific client's situation.

 

I do not see any reason to add a margin and have never encountered ATO concerns.. In fact that may complicate calculation of the balance due at any time and mean additional records are required for the lender / trustee loan distinct from that of the bank / borrower loan which the bank will account for. Deductibility is not as much based on the borrowing being documented and maintained. It is also based upon the trustee use of the borrowed funds. Not all "business use" borrowings are deductible. eg TR 2005/12 and other principles.

Our preferred law firm loan document caters for a back to back loan

 

Are there any issues having an offset account linked to a split (deductible) loan? Does a debt recycled back to back loan change the answer?

@Paul@PFI can you please PM the law firm you use to draft up agreements?

 

It would be reducing deductible interest if you did that. If you are talking about parking borrowed money into this account there would be a few issues to consider.

what do you mean by this?

 

If I have multiple 20k splits that have been recycled, would there be any issue on merging those splits into one?

 

yes

 

the idea actually only occurred to me because I was talking to the bank about interest rates and they asked if I wanted them to merge any of the splits so I would assume they were happy

 

Which bank?

 

They dont deal with the public other than on referral. They work with approved (and in some cases accredited) advisers.

 

Macquarie

All loans with Macquarie, there wouldn’t be any monetary benefit to doing this I don’t believe, would just clean up my accounts a bit

 

Hi Terry I’m in a situation where I have a chunk of cash but unlikely to be able to refinance to a mortgage that allows a line of credit or I.O. I have a split loan so was considering paying off one of the splits then redrawing this amount to invest in shares (will check with my broker that redrawing will be easy enough). The repayments would continue to be p&i, I know this isn’t the ideal scenario but I believe it is still worth doing as I am then using my spare cash to invest and will have converted a large part of the current loan to deductible debt. Does this seem about right or are there any massive red flags I am missing?

 

I think you should be able to combine them with Macquarie without a reassessment.