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Using line of credit to invest in shares: tax question

Discussion in 'Stock Market Nuts and Bolts' started by Some Guy, Jan 31, 2020.

  1. Some Guy

    Some Guy

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    [​IMG]
    I'm looking at using leveraging for investment. I've decided that I will take out a line of credit as a separate loan against my home, the idea is to put the money into my current portfolio of ETFS and LICS. Currently my dividends are completely reinvested through DRIP.

    Option one:

    • Keep reinvesting all dividends through DRIP, really taking advantage of compound interest over the long term.
    Option 2:

    • Pay dividends into loan.
    Either way I will be making regular payments on to the loan with the intent to pay it off. My main questions are:

    • Is it more tax efficient to pay the dividends back into the loan?

    • If it's more effective tax wise to direct dividends towards the loan. Would the compounding effect of reinvesting the dividends over time outweigh the tax efficiency benefit of paying the dividends into the loan?
     
  2. Knobby22

    Knobby22 Mmmmmm 2nd breakfast

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    I borrowed a large sum of money to buy shares and personally I use the dividends to offset my loan repayments.

    It means it reduces your repayments which gives you more flexibility.

    My aim is to pay off the loan through capital gains.
     
  3. Austwide

    Austwide

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    The way I see it

    The loan must only be used for investments and can not used for a mix of personnel and investing without becoming inefficient tax wise.

    Tax wise I see no differences, tax credits don't change either way.

    The divs received are like getting extra cash, so if you buy more shares(DRIP) or reduce the loan is up to you.
     
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  4. bonox

    bonox

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    the 'proper' way is to do the maths. Cost of interest, less tax deduction, of reinvesting, plus future earnings on the reinvestment, compared to lower cost of interest and forgoing future dividend income of putting the dividends into the offset account against the loan.
     
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  5. Some Guy

    Some Guy

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    Thanks for all the replys. It sounds like all is good tax wise so long as I take the line of credit out as a seperate loan, and only use it for investment purposes. I will do the math and see if reinvesting the dividends through DRIP or paying them back into the loan is best.
     
  6. frugal.rock

    frugal.rock "Time weight's on man"

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    Good luck with the math... it is the way to get the answer you seek.
    The term (length) of the loan is probably the major factor, as this is what you are comparing the DRIP compounding to.
    Benefits from the DRIP factor will show up in longer terms, but remember that it is variable and past performance doesn't indicate future performance.
    My :2twocents
    F.Rock
     
  7. Value Hunter

    Value Hunter

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    Generally speaking with interest rates on property loans being as low as they are and dividend yields on shares still being pretty solid it most cases it will end up making more sense to participate in a DRP (or use dividends to buy shares on market) compared to using dividends to pay down a loan. Of course it depends on the exact interest rate on your particular loan and the dividend yield on your share portfolio but in most cases what I said will be true.
     
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  8. So_Cynical

    So_Cynical The Contrarian Averager

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    Record keeping is super important what ever mix you use.
     
  9. kahuna1

    kahuna1

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    NO answer even close ....
    GO and see an accountant or certified financial planner.
    Its complex is the answer ...

    could be one of 50 answers.

    Are you working ? Do you have a SMSF
    IT could be margin leverage on the LIC is the go ...
    if you in drawdown of near that of pension side another answer ..

    Obvious question neither will ask is are you mad ?
    Going leveraged at all time highs ? I thought one bought LOW and sold high not the opposite.

    Tax effective of say salary sacrifice at top end marginal rate and paying a mere 15% adding to a SMSF or even better one that is done via one of the industry funds where you can hold shares. Problem of course being getting leveraged.

    Not paying 30% MORE effective tax and salary sacrifice is of course the best way ...

    I could go on but ... well ... go see a really good planner ... or great accountant which is rare in both cases, Most are hacks and dont use bank ones or linked to any fund.
     
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  10. Toyota Lexcen

    Toyota Lexcen

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    Your questions are really about how you would run the investment strategy.

    You can claim Interest and you declare income. This all goes to "the tax return".

    Could do a model before commencing.
     
  11. Some Guy

    Some Guy

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    I'm 28 years old and have under 130k debt on a 2 bedroom apartment I live in, this is my only debt. I simply intended to take out a 25/30k seperate line of credit against the apartment, pay it of an just repeat the cycle of 25/30k lines of credits one after another untill I retire.

    Think of it as amplified dollar cost averaging, I simply intend to buy and hold and just invest in large etfs and lics. I'm not really going to try and time the market.

    Also my accountant said I have low debt and good amount of income, he wanted me to buy an investment property and negatively gear. Which is not something. I'm too comfortable with.


     
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  12. Some Guy

    Some Guy

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    Also no SMF.
     
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  13. frugal.rock

    frugal.rock "Time weight's on man"

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    Your accountant has given you good advice. With decent landlord insurance, the rental income is sometimes guaranteed.
    IMO, with interest rates low, property on the bounce back, it's an opportune time to get in. (location dependant...)
    Once established, it becomes it's own collateral, a separate entity in a way, which sits there paying for itself whilst providing tax advantages.
    Your line of credit idea can happen concurrently. Just a thought.
    F.Rock
     
  14. kahuna1

    kahuna1

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    If your 28 and thinking of your post age 65 income bravo.

    The simple salary sacrifice of income at 15% tax into super verses ... paying 48% if your up there speaks for itself.

    Taking a loan over your property, any real accountant ... or decent one ... when informed you intend to buy shares would advise strongly against it. One is tax deductible ...ONE IS NOT. Deducting interest on the home loan is NOT.

    Going leveraged against LIC shares IS deductible and a margin loan will allow this.'

    Inside a SMSF even one and cheap option is an quasi one run by an industry fund which will cost you less than HALF running costs, no accountant would recommend as it does them out of massive fees. I am not sure if any or all of them offer warrants where in effect your buying the share ... but its leveraged ... and paid off via the dividends ... would achieve quite a few things.

    Lower your effective tax rate ....
    Exponentially increase your savings ....


    Even a leveraged fund inside a low cost SMSF run by and industry fund achieves the very same thing.
    Most funds have a leveraged option and its inside the listed products of industry funds.

    The choices are simple with all the information. Most will NOT give you the correct choices due to vested interests or commissions. An accountant will be very happy to set up a SMSF for 2k charge you 1,5 k a year to run it .... when you can do the same for $500- a year, the choice of vehicle is simple.

    If your not talking into super where you cant touch it for 40 years .... yes the age will be 70 so 42 years, the obvious and only real choice is to have the Margin loan .. and interest tax deductible .... I would suggest a mixture of the two and salary sacrifice some ... to save up to 30% tax per dollar saved and the rest in something you can access at any time.

    Dollar cost averaging and other such notions when interest rates are at 100 year lows, if not 2,000 year lows inflation asset prices in equities is what it is ... a wank.

    When companies overseas out of the USA are paying half the tax they did a mere 10 years ago ... some never paying tax, not ever ... the valuations are at best absurd longer term. Eventually things will swing back to where the USA based companies must pay tax to the USA let alone the rest of the world and this rally .... stock rally will be met with earnings having to pay 15% MORE tax crash. Of course our stocks not hit with such a bonanza ... but still heavily influenced by world equity prices.

    Possibly this changes for the USA in 2020 ... but their fiscal side is a train wreck ... healthcare a shambles of extortion for the poor which will eventually at some stage be reversed and possibly violently in a short period where we have seen the opposite of an 80% rally post 2016 in the USA side of which the vast majority is due to overall tax paid crashing .... that reversed and well ... USA will come back 30-40% and so too we will follow to some extent.

    Whilst if one is some delusional optimist and thinks the USA can sustain this forever ... sadly the numbers dont even come close to adding up beyond 2020.
     
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  15. investtrader

    investtrader

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    Taking a loan over your property, any real accountant ... or decent one ... when informed you intend to buy shares would advise strongly against it. One is tax deductible ...ONE IS NOT. Deducting interest on the home loan is NOT.

    Going leveraged against LIC shares IS deductible and a margin loan will allow this.'"

    I actually think the opposite. if you have an equity loan against real estate, and have the means to pay the loan off no matter what, then it is far safer than a margin loan. In a huge market meltdown, the margin loan will be called in. it's funny how people will not think twice about borrowing to buy an investment property, but think is riskier using modest leverage for equity investments.
     
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  16. Knobby22

    Knobby22 Mmmmmm 2nd breakfast

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    I do it. The important thing is to have the share loan as a separate loan, not mixed in with your home loan.

    That way you can clearly differentiate the two loans and claim one for tax purposes. Just means getting a split loan, not hard.
     
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  17. kahuna1

    kahuna1

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    Since I happen to have had a tax qualification as tax agent since 1982 ... and accounting degree along with masters ... you may think what you like. The deductibility of a residential home loan.... loan against your residence is NOT tax deductible.
     
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  18. frugal.rock

    frugal.rock "Time weight's on man"

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    My accountant since I started working, retired a few years ago. He was a wise old owl, and looked a bit like one also!
    Haven't found another decent one yet that I am willing to pay... again.
    Are you available for new clients @kahuna1 ?
    Cheers.
    F.Rock
     
  19. bonox

    bonox

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    qualification or not, I can't see the difference between two sums of money where the collateral for one is a house and the collateral for the other is a pile of shares? The purpose (as defined by the ATO) is for investment with expected return and therefore not a deliberate tax loss and therefore avoidance scheme under part IVA, and any interest charged on the loan should be deductible. Why does not being able to live in your shares alter the purpose of the loan and therefore deductibility of the interest?
     
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  20. Toyota Lexcen

    Toyota Lexcen

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    Good information,

    Probably wont be negatively geared either
     
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