Hi, I’ve been reading with interest the posts on LOC’s. I have an existing home loan on my own residence and several investments. I’ve been thinking that I haven’t necessarily been using my money tax effectively. I also would like to increase my exposure to the share market and open up the possibility for an IP down the track.
So my basic aim is to use my money more tax effectively, ie negative gear, and to also increase my exposure to the share market in the immediate future (progressively over the next 12 months) and perhaps an IP down the line but not in the next year or so at least.
House current value $480k with mortage of $145k. I then have a margin loan to the value of $110k with approx %50 gearing and another trading account with no gearing to the value of $35k plus approx $10k in cash.
So I’m thinking that I could structure this a lot better. My current thinking is to take out a LOC to the value of $200k. I then essentially move my money that is in the investment accounts immediately to reduce my mortage to say $60k. I then fund my investment account and increase my ML through the LOC facility. I could increase my ML from $60k to say $150k. So net result is mortage of $60k, LOC upto $200k used to fund investment account of $35k and ML account to value of $300k. My permanent salary is over 6 figures.
From a tax perspective, my LOC is used purely to fund my investments and nothing else, so I would think that the interest on the LOC and ML would be totally tax deductable. Any dividends would then be paid into my ML account.
So all of the above is I think correct. Something I’m not so sure about is captilisation of interest. I was thinking of letting my interest capitlise in both the LOC and ML and directing all my repayments to my home loan. Since my LOC and ML are used purely for investment purposes and aimed at capital growth, I would argue interest can be capitilised.
I am planning to see some finacial advisors/accountant about all this, but at the same time like to do some homework before I go in. Any thoughts, corrections, etc on this strategy would be highly appreciated. I realise this is a long post so thanks for your time.
I have a couple of comments:
1. If you repay you home loan with a LOC it will not be deductible. It comes down to the purchase for which you use the monies. That is, the purpose was to repay non-deductible debt. Therefore, the new LOC debt is also non-deductible.
2. You cannot claim interest that is charged on unpaid interest. This has been covered in great detail. Do a Google search on the Hart’s Case. You’ll find heaps of info.
Cheers
Stu
thanks for the comments.
So if I use the LOC to purchase new investments, then this is ok to claim deductions? As I close out my existing investments according to my system rules I can then move this money to my home loan. Obtaining the result I wanted but over a longer period. So for tax purposes would it be best to open up a new margin loan account to provide clear seperation between the funds provided by myself versus the LOC?
understand what you are saying about capitalisation.
Yes, if the money is used for income producing purposes (i.e. purchase investments) it is deductible.
Probably no real need for a new account as long as you can keep an audit trail of where the money has gone and for what purposes (just in case the ATO audits you).
Cheers
Stu
Some commennts.
You could get a LOC on your home loan, separate to your existing loan. You could then sell all shares, putting the total proceeds off your home loan, and then take the money from your home loan to immediately buy back the exact same shares. This will effectively change non dedcutible debt to deductible BUT you may have a capital gains tax bill on the sale of your shares – but the cost base would be higher for the next time you sell.
If you borrowed $50,000 from the LOC, you could then get a margin loan and borrow another $25,000 worth making it $75,000. The interest on this portion would be deductible.
I also believe that the deduction of capitalised interest is still possible. You just need a very good accountant to structure it correctly. The Hart’s case only applies to a very specific situation.
Terryw
Discover Home Loans
North Sydney
[email protected]Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
So if I use the LOC to purchase new investments, then this is ok to claim deductions? As I close out my existing investments according to my system rules I can then move this money to my home loan. Obtaining the result I wanted but over a longer period.
I would suggest that you need to first repay any borrowings that funded the purchase of these investments then direct the remainder into your home loan.
Otherwise it is a proven strategy if I understand it correctly.
Simon Macks
Mortgage Broker
http://www.mortgagehunter.com.au
0425 228 9853 year fixed rate – 6.85%
Comments may not be relevant to individual circumstances. If you intend making any investment, financial or taxation decision you should consult a professional adviser.
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