Tax Tip 6: Using Redraw to invest

It sounds like your PPOR isn't fully paid off, but completely offset.

What happens if you take money out of an offset? The interest charged increases. The loan relates to a property which is the main residence so that increased interest won't be deductible.

A solution to your problem is to just leave the money in the offset and borrow more to invest in shares - separate splits.

 

Thanks Terry,

Yes the loan is completely offset but I cannot borrow more in a separate split.

I understand the interest is not deductible if taken from the offset, which is why I thought putting it into the loan then redrawing would make it deductible. However, I lose access to the interest deductibility when I sell shares and pay down the loan, if I were to ever rent out the place. Is there a better solution?

 

If you can't borrow then no other solution.

Choose between claiming interest now, and getting a sure tax deduction
v
using cash now paying more interest which is not deductible on the chance that you may rent the property out in the future.

Just make sure you cannot borrow.

 

Ok got it thanks.

A left field idea I had which I may not do- If I rent out 1 of 2 bedrooms in my place while I invest in shares, will half the interest be deductible? Then when I sell the shares, I repay into my offset and I still have full access to those funds in the future. I understand I may need to pay CGT when I sell the PPOR but if it was for less than 6 years then I still get an exemption?

 

no 6 year exemption on renting out rooms. Could cost you more than you get in rent!

 

I see, thanks!

 

What if I had a ppor with redraw facility and no offset and pay the amount down to 0 and then redraw 25k to get shares? Would this work or would it make it messy book keeping??

 

You run the risk of the ATO denying the deduction, but you could try to argue that the borrowed funds could be traceable if you could redraw and buy the shares in quick succession.

 

Will have to look into it and speak to my accountant as spoke to a branch bank clerk and they seriously had no idea what so ever about borrowing or tapping into equity or using my redraw to get access into shares as low as risk as possible ie sensible gearing! They are just data input clerks and pushing their own products! Was very disappointing!

 

I also meant paying down the amount balance down to zero and thus having full redraw available and then borrowing for shares then from this stage

 

I suggest you talk to your bank before you do this. For some loans if you pay down to zero they automatically close. The bank will have a minimum balance to keep the loan open. Last time I checked, mine was $1.

 

Can you pay directly from the loan account?

 

I can reduce the loan balance if that's what you mean! Currently around 540 dollars balance and redraw available around 249k

 

not what i mean.

How do you get the borrowed money from the loan to the share purchase?

 

Unsure as I have never used the redraw facility! I would assume redraw and transfer funds to cdia account and purchase from there!??? Just spoke with am accountant and they mentioned that the would just apportion the interest on the loan based on what percentage is related to home loan and what percentage is related to shares! He said the only big issue is of u continuously use the redraw and it would become messy that way hence a spreadsheet would need to be used to apportion and separate the home loan and share interest portions!

 

By transferring to another savings account you run a risk, an extra risk.
see tax tip 1

Apportioning is ok if the loan is IO, but any payment into it will reduce the deductible debt as well.

 

Just spoke with a bank consultant and they said I will have to get a margin loan or loc facility!

Then I mentioned if I pay amount balance to 100 dollars (any less and they will close the loan) and then redraw 20k to cdia account and buy shares and kept track of interest accrued and come tax time I should be able to claim Interest expense at my tax rate come tax time once interest has been apportioned to home loan which I can't claim and shares which I can claim as long as I have evidence for ATO! And they believe I won't need a margin loan or loc now!

Now people wonder why people get confused!

 

Gee wiz, it's a rollercoaster myt just stick to using my own savings I think!

 

Its rather simple really. You just have to borrow to invest...

 

I guess loc facility will be the smarter option!