The Money Mustache Community
Around the World => Australia Discussion => Topic started by: kiwiozearlyretirement on October 19, 2018, 06:34:35 PM
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Hi Everyone,
I seem to be seeing it everywhere at the moment this debt recycling. We have our mortgage for our ppor fully offset and have access to about 100000 easily. So I accessed this for a short time to buy some shares recently when I got overexcited by the price drop. This cost me about $3.50 a day in interest for the time I needed it till I shifted money from elsewhere. So is this interest tax deductible?I bought the shares within the smsf so couldn’t I claim the interest cost? I know it is a risk buying shares with your mortgage but if you have good cashflow then it is only temporary.
I have seen random people say this is possible but not sure I trust it whereas some of you may have had direct experience.
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Ok a few things here.
If you took the money from the PPOR offset to buy shares, no the interest you paid is not dedcutible. You haven't borrowed to buy shares here, you've simply just taken your own cash to do so.
What you needed to have done is pay down the loan and reborrow it as a separate split loan (this is the recycling bit).
The next bit regards the SMSF.... did you contribute the money to the SMSF to then purchase shares? If so, thats two separate transactions (take money from offset to contribute to SMSF, use money in SMSF to buy shares). Both result in no interest deduction sorry.
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Thanks Marty that was very helpful. So when you say pay down the loan, do you have to discharge the loan and reborrow separately? I’m not sure what a split loan is. For example we have not owed more than $100 on our mortgage for 5 years but don’t want to take the $600 fee hit to discharge the loan before the term is up. Also others said having cheap credit in the manner of the offset redraw was attractive.
Thanks
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Thanks Marty that was very helpful. So when you say pay down the loan, do you have to discharge the loan and reborrow separately? I’m not sure what a split loan is. For example we have not owed more than $100 on our mortgage for 5 years but don’t want to take the $600 fee hit to discharge the loan before the term is up. Also others said having cheap credit in the manner of the offset redraw was attractive.
Thanks
Again - these are two words mean very different things. It's a really good idea not to mix them up!
I reckon you should schedule a session with a mortgage broker - you would do well do see how many different options are available to you.
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If you've put money into super you may be able to get a deduction for some of the cost of the shares. You need to talk to your accountant.
Like Marty said, you need to research and see the difference between redraw and an offset account. It's so important and not understood by most of the population.
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I have been looking at getting some sort of split loan. The bank officer said she thought you could tax deduct mortgage money if you can prove you bought shares with it. I spoke to the ATO who spent some time checking this out and they said if you can prove you bought shares with the mortgage money then it was tax deductible.
Not sure I would want to do it as a regular thing as surely it increases the chance of being audited. It seems a bit messy.
https://www.ato.gov.au/Individuals/Income-and-deductions/Deductions-you-can-claim/Interest,-dividend-and-other-investment-income-deductions/#Dividendandshareincomeexpenses1
I know Marty998 was definite that it couldn't be done but help me understand why you think that way Marty.
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If you redraw money then you still have one loan with two purposes. The analogy I know of is that once you piss in a bucket of milk it is very difficult to un-mix the two liquids!
Say you have a PPOR loan of $500k and you pay down $100k and then redraw that $100k and buy $100k worth of shares.
You now have a $500k loan where you can apportion 80% of the interest as non-deductible and 20% as deductible. Sounds easy right?
After one month you get charged $2000 interest (balance $502,000) and make a $3300 repayment (Balance $498,700). After another month you get charged $1995 interest and make a $3,300 repayment. (Balance $497,395). Still with me?
You could easily split the interest as 20% deductible and 80% non-dedcutible. But could you split and keep track of the principle repayments in an 80/20 manner? Yes, with good record keeping.
Fast forward a year and your loan balance might be down to $485,000. Now you redraw another $15,000. You get charged $2,000 interest. How much of this $2000 interest is deductible now? What if you had 12 redraws over the year (trying to implement your debt recycling strategy)...
Can you see how this starts to get very complicated very quickly?
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Thanks Marty,
That sounds totally reasonable. But what if like us we are totally offset and every dollar we borrow goes to buy shares. Is it not clear what the purpose is?
I guess I am just balking at having to pay set up costs and discharge fees and potentially annual loan costs. At the moment our mortgage costs us nothing annually. Does anyone have a recommendation for a good mortgage broker who can outline the options for me?
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Hi Kiwi
I am a tax lawyer and mortgage broker, and mustachian, and maybe this will explain by Marty is correct.
The loan secured by the house was used to acquire that house, (not the shares)
The interest on the loan to acquire the house is nil while it is fully offset.
When money is redraw from the offset the interest on the loan increases. This is not deductible because the money from the loan was used to buy the house and not the shares.
The way around it is to simply
a) split the loan if not using the whole amount,
b) pay the offset money into the loan
c) redraw the offset money and use the funds to buy the income producing asset
d) make sure the borrowed money goes direct to the investment and not into a savings account etc first.
There is no need to pay off the loan completely. You can leave $1 outstanding to avoid the loan closing automatically. There is no discharge of mortgage (which is the security for the loan).
There will also be no costs - unless the bank charges a fee for redraw.
It is a great way to save tax which can help for an earlier retirement.
Terryw
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Thanks Terryw
Yes I knew there was a way of doing it. Unfortunately splitting the loan to free up some of this equity is going to cost money in the form of refinancing application fees and in some cases ongoing yearly admin fees. Our current mortgage with its offset has no yearly fees but will cost several hundred dollars to discharge which is why we haven’t. So it sits there as a potential source of equity but not one we can tax deduct for shares unfortunately.
Thanks