The 2 broad methods of Debt Recycling

Discussion in 'Investment Strategy' started by Terry_w, 14th Jan, 2019.

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  1. Terry_w

    Terry_w Broker, Lawyer, Tax advisor, Debt Recycle advisor Business Member

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    The 2 broad methods of Debt Recycling

    Debt recycling is the conversion of ‘bad debt’ into ‘good debt’. See What is ‘Debt Recycling’? – The Structuring Blog


    Broadly speaking there 2 ways to ‘debt recycle’.

    1. Use the income from investments to pay down non-deductible debt, then borrow to invest further

    Or

    2. Selling investment assets and using the funds released to pay down the non-deductible debt and reborrowing


    The first approach is pretty common, but the second one is often missed. It can work well where the person owns shares because the transaction costs can be very low, compared with property - but it can still work with property.

    The best approach might be a combination of 1 and 2.


    Example

    Bart has owned a few investment properties for a few years. They are positive geared by $100 per week so that is about $5,200 per year in extra funds he can use to pay off his non-deductible home loan.

    But the properties have about $500,000 in equity in them.

    Bart only owes $400,000 on the main residence so what he could do is to sell the properties, pay the tax and used what is left to pay off the main residence debt, and to reborrow to buy more properties.

    This way he uses a combination of the 2 debt recycling methods.

    Of course, there is a lot else for Bart to consider such as, most importantly, his ability to qualify for finance to buy more properties.
     
    Froxy, meni, Kriv and 11 others like this.
  2. codebeard

    codebeard New Member

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    Are there any tax rulings showing how the ATO views this in terms of Part IVA? There isn't any interest capitalised so I don't know if 2012/1 applies.

    However, if you were always planning to sell X and buy Y, couldn't the ATO argue a counterfactual that the most direct way to do that would be to sell X and immediately (ot as soon as possible) use the proceeds to buy Y? Adding the additional steps of having split loans of a convenient size, moving sale proceeds to a loan, and then redrawing from the loan and moving it somewhere you can access for purchasing Y, is several extra steps whose end result is materially the same except you gain a tax benefit.

    Thoughts on this? Have you had any success getting private binding rulings for this?
     
  3. Terry_w

    Terry_w Broker, Lawyer, Tax advisor, Debt Recycle advisor Business Member

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    Yes there is one entitled 'wash sale' and part IVA should be considered and advice sought on whether a pbr might be wise or not.
     
  4. codebeard

    codebeard New Member

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    If selling X to buy Y incurs capital gains, or if X is substantially different from Y, then it's probably not a wash sale. Still, a tax benefit results from putting the money into and out of the PPOR loan between the disposal of X and the purchase of Y.
     
  5. Terry_w

    Terry_w Broker, Lawyer, Tax advisor, Debt Recycle advisor Business Member

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    The same could apply to selling one property to buy another.