Debt recycling questions.

[turboslob]

Hi, I've been thinking of doing debt recycling and have two questions. First one is simple, as I already have a split loan.

1. Is it really as simple as this; pay off home loan offset down to zero, redraw funds to brokerage account and then buy shares? Then, I can claim the interest as taxable? Am I missing anything?

2. This query is for later down the track.....
Context: Say you had a 500k loan and 200k in shares. You then split your loan to a 300k and a 200k loan. Also, your shares are all, say, VAS. 

If you sell all your shares purely for debt recycling (ie, sell 200k VAS shares, re-buy ~200k VAS a few days later), are there any consequence other than potential tax and price fluctuation?

Thanks, Slob.

[Gremlin]

I think you need to discuss this with an accountant.  There's a lot that can go wrong and your post raises some red flags.  If you get it wrong, there's no recovering from it and you'll end up paying a lot of back taxes.

A couple of things you need to be comfortable with...

1.  How do you make sure you don't contaminate deductible and non-deductible debt?  Trying to unscramble this after the event is almost impossible.

2.  How do you avoid anything that resembles a wash sale?  Your second question suggests you need to be across this here.

[turboslob]

Thanks, Gremlin.

I think I'm ok with your first point (pay down loan to $0.00 then redraw). From that point, I figure it's all deductible. Can anyone poke holes in this method?

Your second point is a good one. I'll speak to my accountant and see what they say. If they're unsure, I'll ask the ATO and see if I can get a response in writing.

[Gremlin]

It’s not always deductible in that situation. It depends on where your redrawn funds go, whether they mix with any other funds, etc.  You should definitely get proper advice.  If you muck it up, there is no recovering deductibility.

[deborah]

The ATO are definitely not happy with anything that resembles a wash sale. Gremlin’s points are all about things that have been problems for people in the past - and the ATO really need you to have everything quite clearly separate. I cannot emphasise enough that you need really good documentation and advice.

[turboslob]

I asked my accountant and didn't see any issues in scenario 1 posed. Though, they did mention leaving a few months to prevent the look of a wash sale, in the case of selling and re-buying shares. I'm not currently in this position - just using saved cash.
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To answer Gremlin's query (1) a bit better:

I was thinking of removing entire amount to a different brokerage account to make it simple. Then, everything associated with it is tax deductible. Does this sound ok?

Also, if the house if owned 50/50 with another, I assume you would want to make the brokerage account in both names too?

I was hoping to start this next week, and not cock it up.

[Gremlin]

I asked my accountant and didn't see any issues in scenario 1 posed. Though, they did mention leaving a few months to prevent the look of a wash sale, in the case of selling and re-buying shares. I'm not currently in this position - just using saved cash.
----------------------------------------------------

To answer Gremlin's query (1) a bit better:

I was thinking of removing entire amount to a different brokerage account to make it simple. Then, everything associated with it is tax deductible. Does this sound ok?

Also, if the house if owned 50/50 with another, I assume you would want to make the brokerage account in both names too?

I was hoping to start this next week, and not cock it up.

What did your tax advisor suggest for both these questions, given your circumstances?  You haven't presented enough info to date here for us to know whether you are going to cock it up or not.  But presumably your tax advisor has told you what to do?