debt recycling

Hi SS,
just finalising detail to refinance and invest. trying to digest all the wonderful SS advice and information. Becoming overwhelmed with all the different strageties out there. Can anyone share anymore light on debt recycling in relation to IP's not shares. How to set one up, are they very complicated, legalities of it all.
Or stay way for novice people.

Simple Lisa. Deposit all your income ie wages etc including rents from IPs into your non deductible loan/s , then capitalise the interest incurred on you tax deductible loans in the tax deductible loan it self.

Is this what you're asking?

lisag said:

Can anyone share anymore light on debt recycling in relation to IP's not shares.

Click to expand...

Hi lisag,

This was a fantastic thread for me to get my head around some concepts, great work by Corsa
http://www.somersoft.com/forums/showthread.php?t=26532

Cheers,
Horizon

Thanks,
yes this is was what I was after. Need a bit more insight before I settle on the loan(s) details and before going back to the tax accountant, so I don't sound like a bigger idiot.
I need to digest the thread started by corsa regarding the same.

I'm interested as well.

I have a problem though... my investments are at 90% LVR, the only equity is in my PPOR.

I'm reluctant to take a line of credit on my PPOR to capitalise because the original reason the ATO turned down some setups was because the loans were "linked" which made it a scheme to avoid tax.

If I took a LOC on my PPOR and paid all investment funds/repayments from that, and put all my pay into my PPOR offset to reduce non-deductable debt, I wonder would that satisfies the requirements?

danwatto said:

I'm interested as well.

I have a problem though... my investments are at 90% LVR, the only equity is in my PPOR.

I'm reluctant to take a line of credit on my PPOR to capitalise because the original reason the ATO turned down some setups was because the loans were "linked" which made it a scheme to avoid tax.

If I took a LOC on my PPOR and paid all investment funds/repayments from that, and put all my pay into my PPOR offset to reduce non-deductable debt, I wonder would that satisfies the requirements?

Click to expand...

hi Danwatto,

You will get differing opinions but you need to think of them as this: Opinions.

What you need is an accountant to give you advice on this. Have you got one? Do a search on SS for accountants.

Regards JO

Have a look at this Private Ruling... pretty clear cut - http://www.ato.gov.au/rba/content.asp?doc=/rba/content/69725.htm

1. Make sure you use a separate LOC that allows interest capitalisation. Do not use any portfolio facilities (e.g. SGB & NAB).
2. Document the reason for setting loans up in this manner. E.g. Husband wants to build wealth. Wife prefers to repay home loan prior to building wealth. Wife agrees to investing in property as long as husband uses a loan structure that doesn't retard their ability to repay home loan ASAP. Dominant purpose in this example is to manage investment risk, not obtain a tax benefit.

Of course, this is best set up using a knowledgeable accountant and mortgage broker.

Good luck.

danwatto said:

I'm interested as well.

I have a problem though... my investments are at 90% LVR, the only equity is in my PPOR.

I'm reluctant to take a line of credit on my PPOR to capitalise because the original reason the ATO turned down some setups was because the loans were "linked" which made it a scheme to avoid tax.

If I took a LOC on my PPOR and paid all investment funds/repayments from that, and put all my pay into my PPOR offset to reduce non-deductable debt, I wonder would that satisfies the requirements?

Click to expand...

I am not a fan of capitalising interest. Do so at your peril.

This is pretty much what we do, and it is similar to what you are wanting to do (I think):

Our PPoR has all the equity, and has 2 lines of credit -

one for investment (deposits and purchase costs on IP's)

one for everyday use.

All the IP's and the business have their own individual loans, sitting at 80% LVR.

The overall LVR is down around 50% currently.

All our income - rent, PAYE, and lessons go into the everyday LOC. The business has it's own account, and all the takings go into it. All the takings are used to reduce the business debt, and pay the bills. We take no income from it for ourselves yet.

We pay every bill and live off the credit card as much as possible, so all the income gets to sit in the LOC for as long as possible, and we rack up the frequent flyer points.

Then, the c/c is paid out in full when it falls due every month. This way, there is no interest on the c/c, and the LOC interest is minimised if it goes into the red.

The everyday LOC transfers funds automatically each month to cover the other investment loans and the investment LOC.

We've only settled our first IP last week so I'm not sure if our structure is correct but I think ours is the same with Bayview except that we use a redraw account and an offset. We have a PPOR loan with a redraw which we haven't used except recently as deposit for the IP, and an offset acct which we use for our everyday expenses.

My only apprehension is that we transferred some money from the offset to the redraw account to fund the shortage for the deposit. I think this is alright from what I read from previous posts... but is it? Will the interest added to the PPOR due to the redrawn amount be tax deductible? Where do I get the monthly interest payments for the IP? Is it from the offset or still from the redraw?

One issue I have with redraw account is that I have to transfer the money to the offset account first before I can use it for anything but I pretty much describe the purpose of withdrawal from the redraw and the value is exact to the cent. Is this all right?

Will any of the above actions be seen as tax avoidance?

IP expenses on CC

I have almost the same setup as BayView and ensure I have strict separation of investment and personal expenditure. In addition I have a credit card (no FF points) linked to the investment LOC so that the expenses are separated as well. Not sure if this is absolutely necessary but ensures there is no mix of investment & personal transactions.

BayView - do you pay investment & personal expenses from the one CC and is this OK tax wise, hence investment LOC only has loan expenses in it. Or are there other expenses that come out of the investment LOC as well and is monthly transfer therefore variable to account for these expenses?

regards
Mike

mjinwa said:

BayView - do you pay investment & personal expenses from the one CC and is this OK tax wise, hence investment LOC only has loan expenses in it. Or are there other expenses that come out of the investment LOC as well and is monthly transfer therefore variable to account for these expenses?

regards
Mike

Click to expand...

We pay all expenses from the one c/c, and the investment LOC only has the loan expenses in it.

The only time the balance changes in the investment LOC is when we pay down some debt. We pay down this debt first, and the balances on the IP loans stay the same until the investment LOC is paid out.

I apply the IP expenses from the c/c to the various loans in the tax records.

Haven't had a problem with this setup so far.

As long as the investment loan interest, bank fees and expenses are recorded correctly, there should be no worries.

It may be more straightforward to pay all IP expenses out of the respective loans, but then you have to shift funds around more often from the everyday account.

For us, the everyday account system makes the money handling side of things easier, and then all I have to do is make sure the various IP expenses paid from the c/c end up assigned to the various properties correctly.

Not many of them are needed to be done this way though; most expenses are covered by the PM's, and then taken out of the rent. We see the expense on the statements and receive any invoices with the statement.

Thanks BayView,
Seems you have 2 points of simplification for me to look at
1) Consolidate my credit cards so all expenses come from the one CC
2) Get my PMs to pay the bills.

Being relatively new to this I am paying all of the bills at present (must be the controller aspect in me), however with 3 IPs and looking for more, the work in the accounting and shifting of funds is starting to mount up.

regards
Mike

StuartW said:

Have a look at this Private Ruling... pretty clear cut - http://www.ato.gov.au/rba/content.asp?doc=/rba/content/69725.htm

1. Make sure you use a separate LOC that allows interest capitalisation. Do not use any portfolio facilities (e.g. SGB & NAB).
2. Document the reason for setting loans up in this manner. E.g. Husband wants to build wealth. Wife prefers to repay home loan prior to building wealth. Wife agrees to investing in property as long as husband uses a loan structure that doesn't retard their ability to repay home loan ASAP. Dominant purpose in this example is to manage investment risk, not obtain a tax benefit.

Of course, this is best set up using a knowledgeable accountant and mortgage broker.

Good luck.

Click to expand...

Awesome Stuart, thanks for that. The point I was worried about is whether using the same security is considered being "linked", but that ruling clearly shows them using the same security. As long as they have seperate loan offers, then we should be fine.

However that ruling did mention investment in managed funds, and "Where a borrowing is used to acquire an income producing asset".
In our case, we wanted to borrow to pay for expenses of the income producing asset, not borrowing to aquire. In order to stick with only paying for the asset, we may need to charge ONLY interest to the LOC. It may be best to pay the other expenses out of the rent, which is much easier anyway since we are already paying the PMs for the hassle.

BayView said:

I am not a fan of capitalising interest. Do so at your peril.

This is pretty much what we do, and it is similar to what you are wanting to do (I think):

Our PPoR has all the equity, and has 2 lines of credit -

one for investment (deposits and purchase costs on IP's)

one for everyday use.

All the IP's and the business have their own individual loans, sitting at 80% LVR.

The overall LVR is down around 50% currently.

All our income - rent, PAYE, and lessons go into the everyday LOC. The business has it's own account, and all the takings go into it. All the takings are used to reduce the business debt, and pay the bills. We take no income from it for ourselves yet.

We pay every bill and live off the credit card as much as possible, so all the income gets to sit in the LOC for as long as possible, and we rack up the frequent flyer points.

Then, the c/c is paid out in full when it falls due every month. This way, there is no interest on the c/c, and the LOC interest is minimised if it goes into the red.

The everyday LOC transfers funds automatically each month to cover the other investment loans and the investment LOC.

Click to expand...

We have a similar setup, but with an offset account. Paying all the non-investment bills with the CC, and then clear the CC with the offset at the end of the month.

Each property has a LOC that paid for deposit + stamp duty, then a standard loan. When equity has built up, we refinance the LOC and the standard loan so each property eventually has one loan.

However the main difference is we always keep the properties seperate, i.e. if we buy two properties, we use two LOCs. The good reason for this is that I have lived in an IP before, and next year I will move into another of my IPs. So the ATO will be happy everything is very specific on it's purpose. We never apply for redraw either, as our PPOR can become an IP in future. It's also useful if you want to sell one property, so the ATO knows that you're not "drawing funds for personal use" when you sell. If they are seperate, then the leftover cash from the sale is your own cash and doesn't have to pay down the loan.

So in future, we want to add to this to create a LOC that pays all IP interest. As our goal is to build up cash in our offset to lower our PPOR debt. At the moment we are paying just as much to both, but to capitalise interest on the IPs we could accelerate our PPOR payments. Our PPOR is at 85% LVR, so we don't want to leave it that high when IPs are similar or lower.

It all starts to get complex, but hopefully our accountant can sort it out if we try and do it right. I've got a little more thinking to do yet, and valuations to do as well!