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Borrowing against a property for investment

Discussion in 'Business, Investment and Economics' started by Zaxon, Jun 12, 2019.

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  1. Zaxon

    Zaxon The voice of reason

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    If you take a loan out against a property separate from you mortgage, you can use the interest charges as a deduction against the profits made from investing that money.

    For the interest to be tax deductible, does that money have to be invested in a brokerage account under your own name? Or can it be invested in an account via a trust which you own/control? I'm thinking the trust is technically a separate entity. On the other hand, the profits from the trust are returned to you, and you pay tax on them in your own name anyway.
     
  2. HelloU

    HelloU

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    deleted this zaxon but u got the gist
     
    Last edited: Jun 12, 2019
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  3. Zaxon

    Zaxon The voice of reason

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    Getting the money into the trust is the tricky part. The usual methods are a gift or a loan. A gift I don't think would work in this case, since inside the trust it's free money. I don't think gifting the money to a trust counts as something to offset interest payments against.

    Loaning the money to the trust: I guess the trust could pay interest to you. It could realize the interest as a deduction inside the trust. You receive the interest payments from the trust, which you use to pay the bank with. Sounds awfully complicated.

    This is what I have in mind. If you are ahead in your mortgage payments, you can do a redraw. A redraw counts as a separate loan from the tax man's POV (so I believe). The bank is happy for you to spend that on a holiday etc, so investing it should be fine.
    Yup. I'd pay the interest payments personally. The bank would be none-the-wiser.
     
  4. HelloU

    HelloU

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    zax,
    a home loan redraw is not the same as a loan taken for income producing purposes - the ATO (or bank) does not care about a home loan redraw, or care where that money goes once in ur pocket. Do what u like with that ....... that interest has never been tax deductable.

    the other scenario, about taking a "new business loan", and getting a tax deduction for it, that is what i was talking about earlier.

    (and dunno why i deleted it now anyway seeing urs......lol)
     
  5. BlindSquirrel

    BlindSquirrel

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    A trust is not a legal entity. The account would need to be in the trustee's name (likely you).

    So you'd be lending $$ to yourself in your capacity as trustee? That doesn't pass the sniff test to me, but I'm no tax accountant.
     
  6. Zaxon

    Zaxon The voice of reason

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    My understanding, based on discussions I've seen elsewhere, if 100% of a redraw is used for investment purposes (so not mixed purposes), since the redraw acts as a loaned sum used solely for investment, then the interest charged on that redraw should be tax deductible. Of course I could be wrong :). You may have to take out a second mortgage. But I'm not sure of that.

    I'm also of the understanding that a loan doesn't have to be a "business" loan. For instance, if you have an investment property, it's possibly a personal loan in your own name. But the income is still taxable, and hence the interest is still deductible.
     
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  7. Zaxon

    Zaxon The voice of reason

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    Correct. But the ATO treats it as one.

    upload_2019-6-12_12-47-12.png

    The trustee is a company. I believe you can lend money to a trust or a company you control. Whether it's worth it for my purpose, is another matter.
     
  8. Zaxon

    Zaxon The voice of reason

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    This is from the ATO website. It speaks to interest on a loan being a deduction when used to buy shares, and that if a loan has a personal and investment part, as long as you can keep the parts separate, the interest on the investment part is deductible. I believe a redraw where 100% of the money is used for investment purposes, would qualify.

    upload_2019-6-12_12-56-15.png
     
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  9. HelloU

    HelloU

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    difficult in a forum to discuss applicable particulars ... (i used the word business earlier to mean a loan taken for any income producing reasons, rather than any loan taken to buy a house or car or pay for an abortion or breast enlargement)

    in ur above post they are NOT talking a redraw but a new loan ...... where some loan money was used to buy shares and the balance used for a breast enlargement.

    so,

    if talking redraw cash from a home loan (and that cash is then invested in whatever), then that is CASH that was used to invest and so has no interest deduction amount attributable to it from ATO perspective. (it is NOT a loan of any sort that was used to invest - but it was cash money used to invest.

    so,

    if talking a home loan, the ATO (and lender and legal system) looks at the "purpose" of the loan .... and the purpose of a home loan is to buy a house to live in ...... so none of that interest is tax deductable ..... no matter who else is doing what dodgy scams with their tax returns with interest from their home mortgage.
     
  10. Value Collector

    Value Collector Have courage, and be kind.

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    Yeah, you can definitely claim a deduction for interest used on an investment loan.

    What matters is the purpose of the loan, not be collateral.

    For example, if you borrowed $100k to buy shares, that’s an investment loan and is deductible, the fact that you are using some personal asset as collateral for the loan doesn’t mean it’s a personal loan.
     
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  11. HelloU

    HelloU

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    this bit zax, it is about a NEW loan being done in some form that permits the interest payments to be tax deductions .... and the "purpose" of the loan gets written into the documentation ...... (or rather the loan purpose may not be EXCLUDED by the documents - which is why personal loans can be used to buy shares and u get a tax deduction for interest, but u cannot get a home mortgage and then use that loan to buy shares )
     
  12. HelloU

    HelloU

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    good job mate, u said breast enlargement and not penis enlargement ......
    all that therapy u r attending is paying dividends ......

    (please do not now say "keep it up")
     
  13. Zaxon

    Zaxon The voice of reason

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    Let's break that down into two sections. Firstly, let's consider the ATO's requirements of a loan.

    Based on my understanding, plus based on Value Collectors comment:
    Based on the answer given by the ATO I quoted above:
    upload_2019-6-12_15-19-29.png

    For tax purposes, a loan doesn't need to have a purpose legally written into it to make it acceptable to the ATO. It just needs traceability. For instance, if I did a redraw on my home loan for 50k, that 50k then showed up immediately in my brokerage account, I then buy 50k worth of shares with that money, I've satisfied the conditions set by the ATO as a tax deductible loan.

    Your second point, as to the bank not allowing a home loan to be used for investing, I did ask my bank about that. "What if I paid off my loan in full. Could I take a new loan on my existing property, without having any intention of moving house? For example, if I wanted to invest the money?" My bank said it only cares that we can service the loan - high enough wage, and that they have an asset to secure the loan against - the house. Other than that, they didn't seem to care. Notwithstanding I haven't actually put that to the test.
     

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  14. Zaxon

    Zaxon The voice of reason

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    At least we know what going on in your head. We'll add that to your file.
     
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  15. HelloU

    HelloU

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    preface - this is not advice

    Your second point, as to the bank not allowing a home loan to be used for investing, I did ask my bank about that. "What if I paid off my loan in full. Could I take a new loan on my existing property, without having any intention of moving house? For example, if I wanted to invest the money?" My bank said it only cares that we can service the loan - high enough wage, and that they have an asset to secure the loan against - the house. Other than that, they didn't seem to care. Notwithstanding I haven't actually put that to the test.

    that is a NEW loan .... the paperwork will change and it will get a new account number, it is not the same loan so the purpose of the loan has changed.

    next,
    I thought the discussion was relating to a redraw on an existing home loan (where the sole purpose of the original loan was to buy a house to live in). If this is what is being discussed (like the 50K redraw example above) then that 50K is in the form of cash to your broker (it did NOT come from loan money at loan DRAWDOWN but was a refund from your home loan account due to a series of overpayments that u made to that account). That 50K has NOT come from "loan" money and therefore NONE of the home loan interest in the future can be put into ur tax return and claimed back. That 50k was NOT part of the loan DRAWDOWN, so does NOT have future interest associated with it.

    that is why u CANNOT withdraw more than that overpayment amount without doing a loan RESTRUCTURE with ur lender - and that restructure then changes the PURPOSE of the loan, and allows some of the interest to be potentially tax deductible.

    none of this is advice
    done here
     
  16. HelloU

    HelloU

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    soz zax
    just read the opening post of urs again.

    ur 1st paragraph is correct - i did not read the bit about a new loan being separate to the mortgage loan, and so may have derailled this a bit.

    (a redraw is not separate, so treated differently to a separate loan)
     
    Last edited: Jun 12, 2019
  17. macca

    macca

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    I think you need to ask a very good tax accountant or get a written ruling from the ATO on how it needs to be done
     
  18. willy1111

    willy1111

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    I believe you're correct a redraw is classed as new borrowings by the ATO and if used to generate income, interest is likely to be deductible against the income.

    If doing so, I would ask your lender to split off the portion you intend to use for investment before you redraw. This keeps private/investment loan portions completely separate and avoids any repayment apportioning issues down the track.

    Example. You have a home loan of $100k, you pay it down to $60k and have $40k redraw.

    Request your lender to split the loan, so you have loan A $60k and loan B $0k with $40k redraw, then redraw the $40k to purchase income producing shares.

    There are some good posts by an Accountant on another forum if they interest you...

    https://www.propertychat.com.au/community/threads/debt-recycling-using-shares.27591/#post-700955

    https://www.propertychat.com.au/com...ies-on-loans-and-tax-issues.5108/#post-603617
     
  19. Value Collector

    Value Collector Have courage, and be kind.

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    Zaxon is right, as long as you can prove to anyone that asks questions that the funds were used to buy an investment you are safe.

    You can do a 50/50 personal and investment loan, and it’s totally legal, it just requires more paper work and record keeping.
     
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  20. Austwide

    Austwide

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    Just to muddy it further
    My understanding is, if it part of another loan then all repayments on that loan take a proportion of each loan. ie Normally it is wise to pay off the non claimable loan first and keep the tax deductible loan at its max.
    Some banks allow more than 1 sub-account in the loan account(1 can be int only). That would be clear for the tax and repayment side. No idea about the trust side.
     
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