Tax Tip 2: Debt Recycling

The next problem with CBA is how to you get it from the loan to its destination!

 

With the P&I loan, will only the Interest component be deductible? Or would the whole loan be considered as an investment loan and all payments are deductible?

 

only interest could be deductible

 

Can you use debt recycling to pay an ATO debt. Eg I have a 40k debt to the ATO, I pay 40k into the home loan and obtain a line of credit to pay the ATO.

I have been advised somewhere that you can.

Edit:
Never mind, found this

You can't claim a deduction for interest you incur on a personal tax debt. For example, interest on a loan you take to pay your personal tax debt.

 

However, if the ATO charges interest on the amount owed, this is tax deductible.

Just have your accountant setup a payment plan over 6 months and have the interest remitted at the end. Not always possible but the ATO is pretty accommodating, even now when they are supposedly cracking down on debts.

 

It depends I have a tax tip on borrowing to pay tax

 

Hi @Terry_w

Looking to implement your debt recycling strategy by splitting ppor loan, pay it and redraw to buy shares or etfs.

i understand that I need to transfer the funds to a brokerage account with no cash. My brokerage account doesn’t have cash BUT has shares/etfs, would that be an issue?
Cheers
B

 

That shouldn’t pose a problem

 

does debt recycling to buy shares affect borrowing capacity down the track to purchase another ip?

 

Yes

 

So it’s suggest not do debt recycle if aiming to buy more ips down the track?

 

Best to get some advice. What are you comparing it to? It could improve serviceability or decrease it, it will depend on what you are comparing it to and what the plan is.

 

Hi Crew,

Please let me know your thoughts as to whether I am on the right track. Will get verified.

Current situation -
413000 PPOR loan P&I
240k in offset
+ 4 x investment properties
Looking to put 40k of the 240k into redraw on PPOR
Split 40k into 4 x 10k splits Debt recycle and Pay annual
insurance
rates
water
land tax
maintenance
(Anything else allowed?)

Approx 3500 per property per annum.

Have I got this right so far? Or do the splits need to be 3500?
If 10k is okay, does the remainder of the 10k just sit in each individual split until used the following year?

Should I do smaller splits if allowed by my bank? - can't get my head around the pros and cons.

Thank you

 

Split the loan before you pay into it

 

Thanks Terry, as for it being 3500 or 10k is there any difference?

 

It doesn’t matter as long as you don’t mix it

 

Hi Terry,

Hoping you may be able to clarify the last steps.

1st - split loan
2nd - pay loan in full (ensuring not to close)
This is where I am stuck.
Does the money have to stay in this loan until used? As it will be for smaller investment costs
that would mean I woould need to apply for the redraw each time a bit comes up? Or is there an easier way?

 

I would recommend the borrowed money stay in the loan and is drawn out as need. This avoids the problems with contamination and breaking the connection between borrowing and investing as outlined in my Tax Tip 1.

Why do you need to apply each time you access redraw? Who is the lender?

 

Newcastle Permanent. I will try to double check with them, but money currently sitting in my redraw on my home loan isn't visible for me to use like a transactional account.

 

Hi Terry,
My apologies for not reading the previous 13 pages of this thread. The answer is likely in there, I'm sure, but can you please comment on the need (or not) to switch from owner occupier interest rates to investment rates when debt recycling.

In our case, we have a loan which was used to purchase our home. We have split it into two and used money which was in our offset account to repay one of the splits (down to $1). I am now redrawing those funds to DCA into investments. This loan is still on owner occupier rates as that was the initial purpose and the borrowings haven't been increased since the initial home purchase. I had a mortgage broker tell me today that I can't claim a tax deduction for the interest on this loan because it is an owner-occupier loan, not an investment loan.

I am not seeking to be sneaky with our current lender. I understand the set-up we have is completely legitimate and we do not need to advise the bank that we are now redrawing for investment purposes. Any further borrowings would be owner-occupier or investment rates based on the intention for those funds. Is this correct? Appreciate any comments you can provide. Thanks!