Tax Tip 2: Debt Recycling

Hi Terry, noob here. I've been reading a lot of your posts and they have been really helpful thanks.

I have a silly question, say you get a loan for $800k, and have $160k deposit. Can you immediately use the $160k to debt recycle? Or do the lenders need you to maintain the LVR?

 

Only if you still have the $160k after settlement.

 

Thanks a lot Terry, appreciate you getting back to me.

One other thing I don't fully understand is 're-borrowing' from a loan split. How is this different from taking cash out of the loan?

 

Probably the same thing. When you take money out of a loan it is reborrowing.

 

Hi Terry,

I have a PPOR loan that I am currently refinancing to a different lender. The new lender has approved me for a sum greater than what is currently owed, so at settlement a surplus (say, $100k) will be paid out to an account of my choosing.

If at settlement I receive this surplus into a new, empty account and then use it to invest (shares), will the interest on the $100k portion of the loan be tax deductible?

If it is deductible, what happens as the loan (P&I) is paid off over time and how do you calculate the interest on the $100k loan portion as the overall loan decreases?

I have read a lot of your posts here, and understand a split loan would be best but unfortunately that was not an option when setting up this loan.

CHEERS

 

You will need to seek specific tax advice, but first read
Tax Tip 1: Parking borrowed money in an offset account Tax Tip 1: Parking borrowed money in an offset account

 

Perhaps. If the shares you buy are to hold and resell for a profit then NO its wont be deductible but will be a CGT cost to reduce that profit. If you buy income producing shares then yes. If you buy shares and trusts / ETFs you may need to apportion the deduction between two spots in the return. Many people have zero idea about the difference and think if its on the ASX its a share. Wrong. And if you blend the investments eg shares for profit, efts and trusts and also shares its even more complicated. Unsplit means you CANNOT just calculate $100k x rate and say that the deductible. Your loan may get horribly harder over time. You should ask if it can be split after its created. Will make life far easier.

Interest and fees are what is charged to the loan (debits) and the deductible element. Repayments are what reduces the balance (credits).

 

Thanks for your response. I see how it can get very messy.

And I see your point about calculating interest. Let's say for simple numbers the total borrowing is $200k, $100k (50%) of which is used to invest, can we calculate the interest as 50% of the total interest, rather than $100k * rate?

Sounds like a split is definitely the way to go

 

Was that a question? I can't speculate. Tax advice maybe? Depending on issues it could be non deductible

 

I have a general question regarding selling a PPOR while executing a debt recycling strategy.

Assume I have a loan that has been split for debt recycling purposes and my debt recycling strategy is in motion. I want to purchase a new PPOR. Is there a straightforward way to sell my PPOR and purchase a new PPOR while maintaining the interest deduction for my debt recycling assets?

 

Yes. You will just need to change the security for the splits used for investment purposes and make sure these are not paid out.

 

Step 3 last line- Why would you be making a split from Loan A ? It should be from Loan B !!

 

Hi everyone,
Loving the discussion on this thread.

I had a query about what happens when you buy multiple companies' shares in one loan split. E.g. Split $50k out of a PPOR loan, to recycle and use for investment purposes. Used funds to buy $25k in Company A, $25k in Company B. Down the line, you sell Company A, but hold Company B. What happens then?

 

You have a mixed loan but can just repay the original $25k relating to those shares and the ATO is fine with it.
Tax Tip 55: An Exception to the rule about splitting before Repaying a Mixed Loan Tax Tip 55: An Exception to the rule about splitting before Repaying a Mixed Loan

 

Very interesting, thank you.

In that situation, you've just sold company A and paid down 25k of that loan. Then you want to buy company c down the line.. can you just redraw 25k again to do that?

 

Yes

 

In that scenario, is there any benefit to creating a separate split for each company you buy? I.e. Any reason you wouldn't create a split of 50k, and have 2x25k splits instead?

 

Yes it would be easier if you did

 

Lurker here,

I'm hoping the community might be able point out whether there's any problems with my understanding of the practical execution of debt recycling, with the aim to avoid any mixing of the loan.

1. Split current P&I loan into $25k splits

Understood that P&I means reducing deductibility

2. Pay down a $25k split with savings held in offset

3. Redraw the $25k (so this is new borrowings) direct to brokerage service (SelfWealth) that is empty of any existing cash holdings

4. Purchase VDHG, and then transfer any remaining money directly back into the same mortgage split

5. Redirect dividends back into the offset. Repeat once I've sums of 25k in the offset


I also had a question about whether having existing VDHG holdings means that I can't proceed without causing some contamination?

I.e. If a portion of my VDHG holdings was sold, how could it be apportioned that I sold the existing holdings, and not that which was purchased by the debt recycling strategy.

I do not intend to sell any VDHG holdings as it's a long term strategy, just simply trying to structure everything correctly.

My thanks to the community for any advice.

I will also seek specific financial advice before proceeding with this strategy.

 

Seek your own tax advice but these threads may be of interest.

Tax Tip 13: Simple Loan Structuring Strategy Tax Tip 13: Simple Loan Structuring Strategy

Tax Tip 59: Borrowing to Buy shares Tax Tip 59: Borrowing to Buy shares

Tax Tip 148: CGT and Different Parcels of the Same Shares Tax Tip 148: CGT and Different Parcels of the Same Shares