Tax Tip 319: How to Debt Recycle when Investing in Small Amounts?

When debt recycling with small amounts it is easy to end up with a mixed loan due to the fact that the minimum loan size being higher than the amount invested in one hit. This is demonstrated in this Tax Tip of mine from a few months back.

Tax Tip 304: Split Loan as Needed Rather than a Big Split when Debt Recycling

A mixed loan means you have a problem as you will be reducing tax benefits with every subsequent deposit into that loan and this means you are throwing money away.

See: Tax Tip 3: Mixing Loans - Don’t do it


Example

Nelson wants to buy shares in $1,000 lots, but the minimum loan size with his lender is $10,000 how can he do this without ending up with a mixed loan as described in


Nelson would want to split the loan first into the minimum split size and then pay this off in one hit, making sure he doesn’t close it. He would then have a redraw amount of $10,000 (which would be decreasing if it was a PI loan) which he could draw down in stages.



Only seek debt recycling advice from someone who is licensed to give tax advice.

 

Great tip! Works well for those that would prefer to DCA instead of a lump-sum investment.

p.s. your link to #304 is broken.

Here it is for anyone else:
Tax Tip 304: Split Loan as Needed Rather than a Big Split when Debt Recycling

 

@Terry_w

Refinancing PPOR with equity pull subsequently invested that money in LICs /ETFs.

One of the LIC is offering SPP- can I use my savings to take part in that SPP or any potential mixing issues?

Loan amount is seprate and I be claing tax on the initial invested equity pull money and in future divis may increase as extra shares from SPP.

 

Can't claim interest unless expectation of income. If bonus shares issued there is no income. Deductions not allowed

 

In my case interest will be claimed as lets say $200 invested in ETFs and LICs and getting $50 divi etc so interest on that $200 will be claimed....and count to do so


The Question is 1 LIC that I have bought with that $200 is offering SPP and if I use my own money to take part in SPP- I will be issues more shares means potentially more divis no impact on the originaly invested $200

 

I don't understand the question. If you have used cash to buy the shares that pay SPP how is there interest associated with this?

 

Was confirming mixing of the shares - orignal holding borrowed money and SPP - personal saving.

Thanks @Terry_w , appreciate it

 

I can't see how owning shares you haven't borrowed for changes anything but get some tax advice

 

Its more about mixing the shares...nit a tax exowrt and wanted to check

 

Sorry to bring up this old thread while learning my way through all the great tips! Just wondering how people have done this in reality if it is a PI split loan and being redrawn in stages.

If Nelson did not use the split loan immediately, say he starts the DR process next month. Then after 1st month PI repayment, the loan size will be reduced to 9950.
1) Will this cause the mixed loan issue? that only 99.5% will be deductible?

Then the day before Nelson actually uses the loan, he pays it off to the minimum, making sure it will not close the loan account.
2)How to determine the minimum in general? 0.01% of loan size? Would this further reduce the deductibility to 99.5%*99.99% = 99.45%?

Next day when redraw is available, Nelson redraws $1000 to invest, and later invest again at his comfortable pace.
3) Every time he redraws, does he also need to update the bank to keep the minimum repayment?

PI variable rate may change in the future, Nelson would only know the principal and interest when bank actually debit the repayment monthly. At year end, Nelson can get a statement about total interest charged for the whole loan. Also I guess the frequency of redraw is also a factor here, say if Nelson only a small fraction of 10k, then the monthly minimum repayment could pay off the loan.. I've read Terry's Loan Tip: Redraw on a PI Loan, but would like to ask:
4) Is there a practical way to keep track of every draw and its interests? I think it is somethinga tax payer needs to do rather than dumping all statements to tax advisor? or am I overthinking?

Thanks a lot.

 

with a PI loan the limit will be reducing each month. It shouldn't pose a problem for debt recycling if the loan is split and the full split used - other than less being available.

If the one loan is drawn down in stages then problems will arise, as the loan will be mixed

 

Hi Terry,
As the loan is drawn down in stages, along with the scheduled PI payment, the deductibility % will be reduced further, is my understanding correct? It sounds like a management disaster... it seems even worse than the scenario you described in tax tip 304, where people pay part of loan then redraw the part.

in tax tip 304, someone asked the same question: "What if you make a big split but purely use that split off investment purposes in stages? Meaning no part of that big redraw split is used for personal purposes. Will that be OK then?". You said "That could be ok, depending on the circumstances."

Thats why I wonder if people actually choose PI + drawing down in stages and how they do the bookkeeping. From tax adviser perspective, shouldn't this option totally avoided?

lfod

 

The loan will be amortising if it is PI, but you should still draw it down in one hit.

 

Thank you Terry! To me this should be avoided, if I am not able to draft the spreadsheet to follow...Not sure if my tax advisor wants to do it and also it gets convinced by ATO.

If loc is not available, I think better to use IO, pay it down to minimum (0.01%), then redraw and slowly consume it. As long as the loan is not mixed for different purposes and no extra repayment than monthly interests, the deductibility is constant 99.99%...

 

I think you are misunderstanding something.

 

Thanks Terry, let me go through other posts and think more

 

If ALL of the use remains that specific purpose then I dont see any issues with gradually drawing it down. This assumes that you continually hold the investments of course. If they are sold then deductibility could cease anyway. Over time the .1% could even erode so its 0.00001 and so for practical purposes it rounds off to 100% deductible. The key issues is when you use the new borrowed $$ is that is is directly paid from the loan and doesnt blend / mix or taint with other funds.

 

Could Nelson split his homeloan after the fact, (in accordance with your 'working out the portions of a mixed loan' article)
Eg.
If Nelson did not split his PPOR home loan but rather paid $10k directly into the main loan (interest only) Could he redraw 1k lots for investment and apportion the interest deductions, once he has redrawn the entire 10k, then split the 10k off after?

 

a mixed loan could always be unmixed, but this should ideally be done quick as any repayment into a mixed loan is reducing tax deductions.

 

Terry if i have a PI split and want to dollar cost average, would have to pay down the loan, redraw the full amount and leave it in the offset account linked to the split? That way would avoid mixing the loan?