Using line of credit to invest in shares: tax question

Toyota Lexcen said:

Good information,

Probably wont be negatively geared either

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It's pretty hard to buy shares, even growth shares that I favour and negatively gear.wjile paying 3% interest rates.
Still can claim a deduction at tax time and more importantly be able to own way more shares. I have had a great six months and paid a third of my loan off while still having the same amount in shares. Half in wife's name so lower tax rate for her.

Great for bull markets. Not so good if you don't make a decent profit. You really need to make at least 5% a year to be worth it. Really you want at least 20%.

kahuna1 said:

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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Not sure what I missed here ? Are you saying drawing down on a line of credit to buy dividend producing stocks.. the interest on that portion is not tax deductible ??

Easier as I said ... margin loan and why the hell would someone set up a whole new loan ... mortgage separate when one can use a margin loan over shares you own likely up to 80% leverage ?

Its actually idiotic to be even discussing taking out a secondary loan ... so the tax office is happy .... over your residential address with the sole purpose of buying shares which will require no co mingling of funds and so on.

Its utter rubbish to even suggest it .... margin loan ... one piece of paper and the nexus between asset and expense or interest expense is very clear. Low cost and .... if you shop around lower than most home loans.

Just go see an accountant who actually knows his stuff.

That I was debated over salary sacrifice .... NOT paying 30% more in tax .... and it was not even mentioned until I did so ... shows the actual knowledge base on this thread.

Speaking about taking a separate loan .... to buy shares on the residential place you live in .... of course possible but an absurdity in reality. If you knew what they charged for second mortgages in interest you would .... not even be so stupid as to suggest it. I think someone is suggesting that is not needed ... you can just draw-down on home equity loan and the tax office will allow deductions. How did you BUY that boat ? That Car ? Prove it ? .... whilst an audit is 50/50 over time .... this sends a red flag that well ... rightfully makes the ATO go nuts. You went on a trip overseas i see ... it cost 30k ... your shares cost 30k .... which is which ?

Second Mortgage Over an asset not worth a hell of a lot .... under 500k .... why not use credit cards and pay 20% .... its not quite that bad ... but not that good either. I am being rude of course .... to suggest it.

Far out .... go see a chartered accountant .... of financial planner one well qualified and have all your details as they will charge at $400- n hour ... for what I just gave you was 2 hours worth !!

DON'T BLOODY ARGUE with them ... they know their stuff or should. If in doubt google it afterwords and ATO is quite helpful if you ask.

Please as my post line says ... dont take advice of people on the internet and that includes myself.

Do the sums .... the costs .... to go thru a new mortgage .... or pretending .... which is dangerous that you draw-down on the equity in your home for the sole purpose of buying shares never ever passes a tax audit .... for the simple reason that funds become totally co-mingled and over time the lines become blurred totally.


Something happens .... kids ... divorce ... illness and if your audited which may not of course occur, the initial intentions is out the window ... the income and capital gains losses and expenses all a total sham ...

Ahhhh ... the internet

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.""

I said an equity loan or line of credit or whatever you want to call it. The purpose of the loan is relevant, NOT the security used. Many small businesses have their home used as collateral, for example.

... for the simple reason that funds become totally co-mingled and over time the lines become blurred totally."

Kahuna1 , with due respect you are not really sounding like you actually have experience in this area. It is just a basic requirement that the loan is used solely for investment purposes. Easy to audit. Most banks have a facility to split accounts so you can do this within the one line of credit.

investtrader said:

... for the simple reason that funds become totally co-mingled and over time the lines become blurred totally."
.

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Exactly, if your are audited by the ATO, there is no grey area, it has to be purely transparent.

Don't be too trusting of what those good folks down at the ATO,tell you over the phone,either.Ask for a private ruling(I think that's what they still call it).That thingy comes in the mail and you can rely on it.

Austwide said:

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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As above the loan must be separate for 2 main reasons (maybe more)
1 Transparency, the purpose of the loan was for investing, making money.
2 If a single loan (not split) is used for private and investment (and you could prove the investment component) , any repayments would come off both uses of the loan by the ratio of the loan.

ie 100K loan 50K investment 50K private.
You say get a 50K inheritance and try to pay off you private half of the loan.
No go, the loan will still be 25K investment 25K private.

investtrader said:

Kahuna1 , with due respect you are not really sounding like you actually have experience in this area.

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NOPE NONE AT ALL .... you know best.

The gent above has kindly covered it .... until I mentioned it ... purpose .... records and so on ... NOW I dont have any experience ?

LMFAO

Sadly ... I do, and actually shared it only to be told by some twat I didn't have any experience. I thought I had a masters in accounting and 35 plus years experience. Silly me.

It is quite simple.
Say you are paying off your house.
You then decide to borrow to buy shares or start a business or whatever.

So you take out a second loan based on the equity in your house. You tell the lender it is an investment loan.

When you take out the loan you use the money borrowed only for the purpose of the loan.

If you sell some shares and make a profit or make some money in the business and it is clear profit, you declare it for tax purposes and then you are free to do what you want with the profit component including paying down your home loan.

If you get an inheritance of 50k or win tattslotto then it's your money to do what you like. You can use it to pay down your home loan and not put any in your investment loan.

It's straightforward as long as you use the investment loan only for investment.

I do this. There are no strange issues.
I do get my return checked by an accountant. I have an M B A. Which is not really relevant.

Some Guy said:

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.

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Be aware that if you do a redraw on an existing home loan (ie, non tax deductible loan), and use the redrawn money for investing purposes, then the interest paid on the redrawn part becomes tax deductable from the perspective of the taxation office. (refer ATO tax ruling TR2000/2)

OK, so my current plan is to take out a completely separate line of credit secured against my property and use this for absolutely nothing but investing in shares. I plan to take my time an be very clear with my bank about what the loan is for and what I hope to achieve.

I will be taking Kahuna1s' advice and at the very least running this past my accountant before doing anything.

Toyota Lexcen said:

Good information,

Probably wont be negatively geared either

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Hi some guy its been nearly two weeks since you asked a quite reasonable question and bonox suggested the answer lay in you spending a half hour or so behind a spreadsheet. Most answers here have made no attempt to address your question. Hows the spreadsheet going ?

KD2560 said:

Hi some guy its been nearly two weeks since you asked a quite reasonable question and bonox suggested the answer lay in you spending a half hour or so behind a spreadsheet. Most answers here have made no attempt to address your question. Hows the spreadsheet going ?

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Hi KD2560, spread sheet wise since my dividends are slightly more than the interest on the line of credit, I have decided to reinvest them. I have only just stated the process of getting the line of credit approved today. I had to run through what I'm going to do with my accountant and double check with the ATO. I'm only opening a 25k line of credit, I intend to use the full amount and poor it into the LICS and ETFS that I own. As the line of credit never closes I will simply keep doing this, I will pay the line of credit down quickly then redraw the full amount again and invest, I intend to keep repeating this on an ongoing basis.

I simply intend to use leveraged dollar cost averaging and compounding dividends reinvested through DRIP to build my portfolios size over time. As I am being very conservative with the amount of leverage I'm using, if there happens to be a big stock market crash I may increase my line of credit and leverage more, still conservatively but enough to take advantage of the crash. I trust myself behavior wise with ETFS and decent LICS, I wouldn't leverage individual companies, that's just my own self imposed rule.

Some Guy said:

Hi KD2560, spread sheet wise since my dividends are slightly more than the interest on the line of credit, I have decided to reinvest them. I have only just stated the process of getting the line of credit approved today. I had to run through what I'm going to do with my accountant and double check with the ATO. I'm only opening a 25k line of credit, I intend to use the full amount and poor it into the LICS and ETFS that I own. As the line of credit never closes I will simply keep doing this, I will pay the line of credit down quickly then redraw the full amount again and invest, I intend to keep repeating this on an ongoing basis.

I simply intend to use leveraged dollar cost averaging and compounding dividends reinvested through DRIP to build my portfolios size over time. As I am being very conservative with the amount of leverage I'm using, if there happens to be a big stock market crash I may increase my line of credit and leverage more, still conservatively but enough to take advantage of the crash. I trust myself behavior wise with ETFS and decent LICS, I wouldn't leverage individual companies, that's just my own self imposed rule.

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Seems a sound strategy. Straight forward to implement and administer - these tend to be the strategies that are actually followed. Good luck and dont forget to add BBOZ to your watch list. Could be useful.