Tax Tip 2: Debt Recycling

Thank you Terry.

 

Terry_w

what are the options around this scenario:

IP with an equity release attached to it of $100k - all funds still available.
PPR loan of $700k

In a situation where you are soon to sell the IP, could you split the PPR loan to $600k/$100k, use the equity funds from the IP to pay the $100k PPR loan down, then use the $100k PPR loan to invest in shares making this loan against the PPR loan deductible? The loan against the PPR would not be but would be paid out when the IP was sold,

thanks,

 

Move the security of the $100k loan over to the main residence and do this before the investment property is sold.
Tax Tip 74: Selling a property that secures other loans Tax Tip 74: Selling a property that secures other loans

 

different

 

That doesn't matter.

 

Hi all,
Had a question about how the redraw loan amount works for a share purchase in this scenario:

1) Loan split of $10,000 exists, will be used for a share purchase.
2) However, you cannot pay down the entire amount to redraw as this closes the loan down. Therefore, pay down $9,900, redraw and transfer into share trading account
3) Purchase shares, but because of the price, doesn't come to a whole number - $9,850 shares bought

The loan amount will still show the entire $10,000, and interest charged accordingly... however only $9,850 was used for the shares.

What do you do for the remaining $150? I assume you can transfer $50 back into the loan as that was the shorfall between the redraw amount and the amount purchase?

What about the initial $100 balance that was left as you couldn't pay down and redraw the entire amount - what do you do for that? Can you transfer in another $100 for that so the loan balance reflects the total shares bought?

 

pay unused amounts back into the loan and then you would have to apportion the interest - but it would be more than 99%

 

So just the $50 remaining? Or the entire $150?

 

whatever you haven't used

 

Hello Terry_w

Firstly, a BIG thanks for putting such a wealth of info/tips in here!
I have a question on one of your earlier responses (to sandyfeet), but would like describe a scenario before I pose the question.

Scenario:

PPOR loan:$220k linked to an Offset with $200k.

There is only one investment property. The IP loan are in two splits:
IP loan split A: 360k (secured against PPOR as I took equity out of PPOR to fund IP purchase)
IP loan split B: 450k (secured only against IP)
Both IP loans are in fixed rate there is no IP offset account attached to either loans.

My question:

I’d like to buy ETFs using debt recycling. I am looking split the PPOR loan into two parts: 120k and 100k. Transfer $100k from the Offset into the $100k split loan, then withdraw $100k to invest in ETFs.
In couple of years time if I move into the IP and let the PPOR for rent, the IP loan A & B will turn into non-deductible loans. Is it possible to “move the security” of $100k debt recycling loan secured againt my current PPOR to my IP? If it is possible, does it need to be done BEFORE I move into the IP?

If such transfer is possible, i believe the situation would look something like this:

IP loan (previously PPOR):
loan 1: 220k
loan 2: 100k
both loans above are tax-deductible

PPOR loan (previously IP):
loan 3: 100k (transferred from old PPOR to this property, used for debt recycling, tax-deductible)
loan 4: 350k (prev 450k, but guessing ill be taking a 100k split from this) (non tax-deductible)
loan 5: 360k (non tax-deductible)

Need validation on what I've done with loan 3 & 4 is right?
___

Basically, in relocating to IP,

• avoid the $100k DR loan to “double up” as IP loan and a DR loan.
• maximise tax-deductible loans.

Appreciate your time and response!

 

Security is irrelevant for deductibility of Interest. If you split the loan and move the $100k split to be secured against the investment property that loan still relates to the purchase of the main residence (assuming the original $220k loan did so).

If you then pay this down you will have less to claim against the main residence once it is rented.

Consider paying one of the IP loans down instead.

I can't really understand the logic behind your post so may have interpreted it wrong. In any case get tax advice from a tax agent/lawyer before proceeding.

 

ok. yes the original $220k relates to purchase of main residence.

i.e. do the $100k split for Debt Recycling from the IP loan? Sadly, IP loans are locked on fixed rate 4.09pc till Jan 2021.

thanks for ur reply!

 

You could break the fixed loan, where the costs and claim the break fee and borrow to pay it possibly. then split and recycle.

 

Hi @Terry_w
I have a quick question (I hope) around using debt recycling for purchasing shares.

In general if I redraw money to purchase shares then it would be deductible as the new purpose is to buy the shares, however if I were to sell the shares is the loan still deductible as the purpose technically hasn't changed or do I still need to be holding the shares for it to be deductible debt?

 

Think about that for a minute logically and you will realise the answer.

Then have a look at
Tax Tip 272: Borrowing to buy shares and then selling those shares and deductibility of interest Tax Tip 272: Borrowing to buy shares and then selling those shares and deductibility of interest

 

No. Once sold the deductible purpose ends..if it did exist?...did the shares qualify?

 

So if I was to be selling the shares to be used as a deposit for a loan it is best to pay off the loan used for the shares then reborrow to prevent potential mixed purpose?

 

If would be a good idea to. Otherwise interest wouldn't be deductible