Terryw’s Ideal Loan Structure

Great post with everything spelt out thank you.

@Terry_w why do you think debt recycling can be dangerous ? I am interested in your thoughts

 

It is basically a scheme with a dominant purpose of increasing tax deductions. So there is a chance Part IVA could apply to deny the deduction.

 

Just want to check we are talking about the same thing. I am looking at reborrowing the funds for shares with dollar cost averaging - is this debt recycling ?

 

I was mainly referring to borrowing to pay expenses such as rates.

 

This is a fantastic post. Makes it so much easier to explain the strategy to a time-poor and investment dis-interested spouse!

Cheers,
Inertia

 

Hi @Terry_w,

When you say "no detours" when paying deposits/ stamp/expenses etc from a equity loan (loan b) does that include redrawing the funds to a savings/offset account and then immediately transferring the funds out to the vendor/realtor? If it's the same day and in my case within a few minutes I am hoping that as interest cannot accrue and thus no contamination?

 

Yes dont do that or you could lose deductibility of interest. See my tax tip no. 1

 

Hmm that's a worry. I can only redraw from the equity loan into another account, there is no way to pay directly. If I get the bank to create a separate account that I use to redraw funds then pay people is that sufficient?

 

See my tax tip 1 where I have covered this.

I would be inclined to refinance to a lender that allowed you to do these things so as to reduce risk of having the interest deduction denied.

 

Tax Tip 1: Parking borrowed money in an offset account

 

Hi,

I stumbled upon this form only yesterday and already it has provided me a wealth of information as I am literally in the process of structuring for my first investment property - thanks for the information provided here @Terry_w

If I were to setup Loan B as IO with an offset account attached, draw down the full amount but have the excess go into the dedicated offset for the sole purpose of ongoing expenses for that IP, would this be considered a detour and result in interest deductions denied?

Thanks

 

Not sure I have read you right, but if you have no other cash going into the offset you may be able to argue that the interest on the loan is deductible as the borrowed funds can be traced. As long as you don't pay interest with this money. See tax tip 1

 

Sorry, probably didn't make myself very clear, let me try again with an example:

Loan A - PPOR with offset that my income is deposited into
Loan B - IO with separate offset, lets assume $60k
Loan C - IO for $160k

- Draw down full $60k from Loan B
- $40k will go to deposit for Loan C
- $20k remaining will go into the Loan B offset
- Interest will be calculated on the $40k
- Interest payments will be made from Loan A offset (i.e. from my income)
- Rates and other expenses are due, say $5k
- Pay these from the Loan B offset (currently $20k)
- Interest will now be calculated on $45k
- And so on...

Does this make more sense? Am I on the right track? This is how my broker has suggested following recent discussions.

Cheers

 

You need to consider the tax side of things. Will the interest be deductible on parking money in offset account B - see Tax Tip 1: Parking borrowed money in an offset account

If so can you claim the interest on the borrowed money used to pay the expenses. Tax Tip 4: Borrowing to Pay investment expenses

 

In the tax tip 1 post it's not clear if it applies to money that sits in an accountant for a period thus interest deduct-ability and loan contamination issues vs the money passing through an account on the same day and thus no interest being calculated on the monies.

I have spoken with my accountant and he is saying so long as I can prove the purpose of the funds ie. to pay for an investment property I should be good. Appreciate your comments.

 

It doesnt really matter how long it is in the offset. The problem i see with it is that you have broken the connection with the borrowing and the investing by taking an intermediate step and it is also easy to contaminate the offset account by depositing money into it. If any deposit is made the unterest will not be deductible in full.

There best to avoid competely by getting a Loc or IO loan which you can drw down as needed.

 

Terry, You've provided very useful tips about restructuring loans. My situation seems quite simple. I plan to buy my first IP with my name only. My wife and I own and live in our property. But our broker refinanced our Westpac loan to Nab Homeside without splitting the loans two months ago. Homeside loan just has a personal account and an offset account ($140k equity)with both my wife and my names . How can I split a loan account just with my name only and use the $140k as a deposit to buy an IP? Then I can also claim the interest on the deposit $140k according to your ideal loan structure to maximize the interest deduction. I am appreciated with any advice. Thanks.

 

Unfortunately with NAB to split the loan will require a whole new application. But you'll need to do it, or you'll have a mixed purpose loan and won't be able to claim the deductions.

Did you tell your broker you wanted the funds to invest?

 

SImple. Just apply for a new loan under the Peak Performance product in addition to your existing loans.. Both names is ok.

once drawn you can convert this to an IO loan at a lower rate

 

Yes, I did tell my broker to refinance to buy my first IP. The broker didn't tell me the strategy of loan structure. The broker only cared to earn the commission from Nab. Thank you, Jess.