Tax Tip 59: Borrowing to Buy shares

Here is the PDS for VAS https://api.vanguard.com/rs/gre/gls/1.3.0/documents/8189/au

 

This is misleading at best, and arguably wrong. Of the 500 companies in the sp500 about 80% pay a dividend. Generally at a dividend yield of between 1% and 2%.

 

Regarding borrowing to invest, what happens to the interest deductibility on the loan if you change banks?

Example:

Joe is with NAB bank and borrows $200k (Loan B) on top of his $400k loan (Loan A) that he has on his PPOR. Joe gets tax advice and invests the $200k to buy income producing shares (e.g. VAS).

Three years later, Loan A is worth $350k (P&I), and Loan B is still $200k (interest only). Joe doesn't like his rates so he moves the loans over to Macquarie bank and gets .5% less. Joe now has a $350k P&I Loan (Loan A) and $200k interest only loan (Loan B) with Macquarie Bank.

Is Loan B still tax deductible?

Thanks

 

Changing lenders involves paying one loan out with another. That doesn't change the deductibility of interest. The loan will continue to be deductible to the extent it was before, assuming no detours or extra borrowed etc.

 

Ended up here via a link in the show notes for Aussie FIREbug’s debt recycling podcast with @Terry_w. Thank you for being so generous with your knowledge in these areas, I’ve learned a lot from your comments and threads.

I have a question regarding leftover funds after the buy contract goes through.

So you split your loan into portions A and B, pay down the split B zero, and redraw the available balance from plot B the empty brokerage cash account.
After buying shares with an expectation they will pay dividends, there’s say $100 leftover in the trading account. If this $100 goes into the next share purchase will the entire interest from split B be deductible, or are we just accepting you can’t deduct 100% of interest and might have a small percentage of non-deductible interest payable on this split

 

As long as you don't mix cash (non borrowed cash) in the brokerage account you should be fine. Ie it'll all be deductable.

A good reason to make sure your dividends are not paid to your brokerage account but a separate "cash collection" bank account.

 

I will have to write another tip on this i think

 

Not necessarily as you would be paying interest on the borrowed money but not be able to deduct this interest unless the money is invested. If it is a small amount though it won't really matter because of rounding up

 

I say 'generally' as there are exceptions. one is for non-tax residents

 

Borrowing too much in a trust can also lose gross income (lost franking) much like non residents