Tax Tip 6: Using Redraw to invest

Discussion in 'Accounting & Tax' started by Terry_w, 25th Jul, 2015.

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  1. pippen

    pippen Well-Known Member

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    Reading a lot of ashley ormond literature atm and he writes alot about using dividends to pay off principal on share loans be it margin lending and loc. Is this the best way to use the excess positive cash flow as it grows over time especially if I'm still in accumulation mode and working and by using a p and I loan instead of IO loan as he mentions it is effective if you are borrowing less than 100% of the cost of the shares as the plan can still be cash flow positive from day one!?!
     
  2. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Debt recycling is a good thing generally. Borrow against the main residence to acquire income producing assets. use the income to pay the interest on this loan and any excess income can be diverted to paying off the non-deductible loan on the main residence. This will help pay it off quicker which allows you to borrow more to invest - which has a compounding effect as long as the investments produce more income than they cost.
     
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  3. pippen

    pippen Well-Known Member

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    Cheers for your patience and replies! So in my situation having my ppor paid off would help even more as I would not have any non deductible debt to play with and thus therefore extra to pay off the loan and then rinse and repeat the cycle?!
     
  4. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    If there is no non-deductible debt then there is really nothing to recycle.
     
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  5. pippen

    pippen Well-Known Member

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    Exactly, hence my obsession! In paying it off via excess cash flow and dividend interest and then going again and again to build a long term div income stream! Make sense?!o_O
     
  6. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Yes, but it can also make sense not to pay it off. See
    Loan Tip: How IO Loans can Help You Retire Quicker Loan Tip: How IO Loans can Help You Retire Quicker

    Actually you could debt recycle, in a way, even though you have no non-deductible debt. I will write a post on this in the future
     
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  7. pippen

    pippen Well-Known Member

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    Just wondering if this post ever eventuated @Terry_w ?!!
     
  8. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    No, not yet. I have a half finished draft. Please remind me again in a couple of weeks if I haven't posted.
     
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  9. pippen

    pippen Well-Known Member

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    any updates on this article or thread that you were working on @Terry_w?:)
     
  10. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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  11. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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  12. Craig John

    Craig John Active Member

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    How would using redraw to invest work in this situation:

    - Say I have an IO loan of 500k and exactly 500k in an offset account for my PPOR
    - I decide that I want to invest in property and need 200k deposit
    - Before purchasing the investment property, would it be best to split the loan into two - 300k loan linked to offset account with 300K sitting in it, and 200K loan linked to offset account with 200K sitting in it.
    - Then pay 200K into the loan and then redraw 200k to use as a deposit for the investment property

    Would that interest on the 200k loan be deductible this way as it is being used for an investment property?

    Thanks
     
  13. Investor_84

    Investor_84 Well-Known Member

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    Hi, you mentioned the security of the loan does not matter for tax purposes. So if I have a owner occupier loan of 100,000 and an offset to it of 100,000 so technically paying no interest, but I have a investment IO loan of 400,000 and only 50,000 offset, so paying interest on 350,000, would it be ok to transfer the 100,000 from my OO offset to my investment offset to save interest as my OO is at a lower interest rate? Would I be able to claim the interest during tax time even though it’s from my OO loan but have used the fuds for investment purposes?
     
  14. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Yes that is how I would do it.

    Deductibility will depend on the issues discussed in my tax tip 1
     
  15. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    If you moved the money in the offset like this you would end up paying non-deductible interest on your home loan. You would need to pay off the home loan and redraw to pay down the investment loan.

    Strategy: Don’t Keep Large Sums in Offset Accounts Strategy: Don’t Keep Large Sums in Offset Accounts

    Strategy: Borrow Against the Main Residence for an Investment Loan (Shuffling Loans Around) Strategy: Borrow Against the Main Residence for an Investment Loan

    Tax Tip 1: Parking borrowed money in an offset account Tax Tip 1: Parking borrowed money in an offset account
     
  16. j4mesa

    j4mesa Active Member

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    Scenario :

    If a person A redraw 100,000 of equity from his loan to then invest in an unsecured loan , which generates interest of 7% per annum. The redraw is being put into an account with 0 dollar balance to be then transferred to the unsecured loan account

    1. Can the interest of the withdrawn equity be tax deductible ?


    when the person invest in the unsecured loan, he invested it in his name (person A) & his partner name (person B).

    2. If the withdrawn equity is tax deductible, is that fully 100% deductible under person A?


    after 1 year, the unsecured loan is returned the fund with interest to person A bank transaction account & person B bank account.

    3. Is the withdrawn equity still tax deductible if it is kept in the person A bank transaction account ?
     
  17. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    You cannot redraw equity - only borrow money.
    You cannot invest in an unsecured loan - think you may mean 'lend'.

    Your imprecise language makes replying difficult - don't rely on what I write.

    1. See tax tip 1 on the risks with parking borrowed money in an offset
    don't understand what your second sentence here means.

    2. sounds like A borrowed and A and B onlent that money. In this case A would onlending to A and B who then onlend to C. A and B might be able to claim the interest from the bank if this is the case.

    3. sounds like you are borrowed and put in a bank account - interest would not be deductible or at best deductible to the amount of interest income received on the transaction account
     
  18. j4mesa

    j4mesa Active Member

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    sorry for my imprecise language :

    Scenario :

    If a person A borrow 100,000 of fund from his loan to then lend to an unsecured loan , which generates interest of 7% per annum. The fund is being put into an account with 0 dollar balance , to be then transferred to the unsecured loan account

    When the person A lend to unsecured loan, he lend it in his name (person A) & his partner name (person B).

    After 1 year, the unsecured loan is returned the fund with interest to person A bank transaction account & person B bank account.

    QUESTION : Is the returned borrowed fund still tax deductible if it is kept in the person A bank transaction account ?
     
  19. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    See above - my assumptions were correct.

    ps. you can't lend to a loan, only to a person or company.

    and pss - carefully consider that you may not get your money back
     
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  20. j4mesa

    j4mesa Active Member

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    thank you so much for your opinion in this matter :)
     
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