Claiming Tax Deduction on Interest from "Borrowed" Money for Investment Purposes

neilpatrickharris on 16/10/2018 - 13:52

A bit of background:

I currently have a 400k mortgage outstanding on my PPOR. My offset account has 300k cash.

I intend to purchase 400k stock at 50% LVR using a margin loan (i.e. using 200k cash, and 200k margin loan).

Ordinarily I would just claim the interest charged on the margin loan as interest expense.

But I was thinking the other day, what if I paid off 200k from my mortgage and then redrew it for investment purposes.

I'm aware that this would work ordinarily if I were making regular extra repayments on my mortgage such that there's cash available for redraw.

Though I'm not sure if it's in the spirit of the law that I pay off the mortgage for a short period (say 1 month) then withdraw that money for investment. Is there a minimum period I need to have paid off the mortgage for?

The tax deduction would be around $7.5k based on my mortgage rate. I'm aware that redrawing requires me to pro rata interest costs etc which I don't have an issue with.

Just wondering what everyone's thoughts are?

Cheers
NPH

Poll Options

  • 16
    Yes, it's legal and there's no problems with it
  • 1
    Yes, it's legal but it shouldn't be allowed
  • 0
    No, it's not legal but it should be legal
  • 1
    No, it's not legal and it should stay that way
  • 2
    Bikies
Financial

Comments

  • [Deactivated] on 16/10/2018 - 14:09
    +4

    Ozbrag

    • [Deactivated] on 16/10/2018 - 14:12
      +1

      Well op was the world's youngest doctor

  • EightImmortals on 16/10/2018 - 14:10

    Sounds like a good plan but best talk with your accountant first and the check the T&C's for your redraw facility. Are there any prohibitions on what you use the redrawn money for or are you free to do what you want with it?

    (BTW, I'd be pretty careful risking your house or getting into leveraged investments ATM. Even Geoff Wilson is being cautious and advising that cash is king right now. There are many financial bubbles on the edge and any one of them could set off a cascade towards a bear market. Just my 2c )

    • serpserpserp on 16/10/2018 - 14:27

      You won't be able to do it.

    • neilpatrickharris on 16/10/2018 - 15:57

      I'm with ING so no issues with redraw. Aware of the financial bubbles which is why I'm looking to buy some safe stocks as they go near their bottom. I won't be closed out on my margin loan unless the stocks I've selected reach a lower than GFC level.

  • Seraphin7 on 16/10/2018 - 14:25

    As ever, check with your accountant, but the test here is the purpose.

    That is, it doesn't matter that the loan is secured by your PPOR, it is the fact that you are using it for an investment purpose that counts.

    That said, be aware that you have effectively created a 100% LVR proposition (50% via margin loan, 50% via home loan). If your $400k portfolio tanks by a modest 10% you've obviously still got $400k in loans, plus interest, but only $360k in equity against it … or in other words, another year or two of repayments to make on your home loan.

    • neilpatrickharris on 16/10/2018 - 16:00

      In reality the LVR won't be 100% as I have equity in my property from contributing the 200k plus the existing equity I have against it.

      • Seraphin7 on 16/10/2018 - 16:06

        I'm talking about the LVR on the share portfolio in totality. I've assumed you are getting the $200k "cash" by taking it out of offset/your mortgage (i.e. borrowing it) and then getting a margin loan for another $200k. So the margin loan will be at 50% LVR, but the portfolio overall is entirely financed by borrowing.

        • neilpatrickharris on 16/10/2018 - 16:35

          If you're just looking at the share portfolio, then yes it'll be 100% LVR. But that's only because of the way I'm classifying it. I could very well take the cash that I have in my offset account and outright purchase the stocks. That would make it 50% LVR since I wouldn't be borrowing anything.

  • TheBilly on 16/10/2018 - 16:27

    I intend to purchase 400k stock

    Thats alot of eggs in one basket

    • HighAndDry on 16/10/2018 - 16:47
      +1

      I assume OP is buying stocks in different companies….

      • Gandalf the Thrifty on 16/10/2018 - 18:01
        +1

        Maybe he is buying drought affected cattle stock…

  • sir_bazz on 16/10/2018 - 17:20

    I'm not sure I get what you're trying to do here.

    Cash goes in to the offset for a month and then comes out again, leaving you back where you started.

    • neilpatrickharris on 16/10/2018 - 18:19

      It's currently in an offset account. It'll be going towards my loan account to pay down the loan then subsequently redrawn. Not the same.

      • sir_bazz on 16/10/2018 - 19:19
        -1

        Maybe I need another coffee but Im still unsure of what you're hoping to accomplish.

        What I mean is, if you add cash to a loan account, (is this your margin loan?), and then draw down the loan by the same amount, your balance is zeroed so there is no deductible interest charge.

        I want to understand what you're trying to do in case its something I can do myself. But I'm just not seeing it yet.

        • neilpatrickharris on 17/10/2018 - 01:54

          I'm not sure how to better explain this. Perhaps the comments below can help.

          • sir_bazz on 17/10/2018 - 05:02

            @neilpatrickharris: Read your new comments and its a bit clearer now.

            You're effectively withdrawing funds from your offset?, to create a new investment loan, (secured against your ppor).

            This is very different from how I read the second half of your OP where it looked like an attempt to somehow transform the balance of your offset account into tax deductible funds by washing it through your mortgage. Clearly that would be a stupid thing to do.

  • idjces on 16/10/2018 - 17:41

    https://www.reddit.com/r/AusFinance/comments/681z70/is_debt_…

    There's an ato link in the thread.

    Not tax advice, but the gist of what to do was

    1. Have a separate account, whose sole purpose is for investment drawdown, ie a Line Of Credit, or i use a split mortgage. If you ever get audited, mixing an account with personal and deductible transactions is a nightmare

    2. Pay down any interest charges on the loan. There was an ato ruling against a scheme were the person would continually increase their deductible LOC by not paying the interest, and then use those extra funds saved to pay down their personal mortgage

    • sir_bazz on 16/10/2018 - 17:58

      Yes your post makes complete sense.

      OP however is looking at utilising an offset account which in simple terms, is a deposit account rather than an investment account.

      The funds withdrawn from the offset account increase his mortgage balance, (which is nondeductible interest on a ppor).

      Unless I'm missing something?

  • neilpatrickharris on 16/10/2018 - 19:26

    Spoke to ING, I can split my current loan into two 200k P&I loans. The first loan can be classified by me as PPOR (which will house 100k cash in an offset account), the other 200k loan will be my investment loan (and can house 200k in cash). The cash sitting in offset on my investment loan can then be withdrawn to purchase stocks. Interest then becomes fully tax deductible on the investment loan, and I pay interest on 100k principal against the PPOR loan but that remains not tax deductible.

    • idjces on 16/10/2018 - 20:02
      +2

      Your loan has been used to purchase the property in the first place. You would need to take the cash out of the offset account, pay down one of your 200k mortgages to $0 owing. Then when you withdraw from this particular mortgage, the purpose of the funds will be based on the new withdraw, ie to buy shares.

      At that point, you would have one mortgage whose origin was your PPOR purchase, and a second mortgage whose purpose was solely for the purchase of shares. The first is not deductible, the second is once you have brought the shares.

      not financial advice

      To add, when you redraw your mortgage, the bank has to send the funds directly to your brokerage account, it don't want it to ever hit a personal account of yours

      • neilpatrickharris on 17/10/2018 - 01:49

        Yes, agree that I'll have to pay it down and then redraw. I don't agree that the redraw has to involve the bank sending funds to my brokerage account. As long as I maintain segregation of funds and use it solely for investment it will be okay. If I redraw and keep the cash in an offset account linked to the second mortgage it should still also be fine as I won't be incurring interest on the account. Besides, the bank would never agree to depositing cash on my behalf into a brokerage account as part of a redraw, they'd only make the funds available in the offset account at best.

        • idjces on 17/10/2018 - 11:11

          I see no reason why the bank wouldn't. The reason for doing so, is to have the trail to prove to the ato the purpose of the funds you are making deductions for, and that they were never mixed with personal funds.

          http://law.ato.gov.au/atolaw/view.htm?docid=TXR/TR20002/NAT/…

          There's too much to read through, but example 53 shows what happens when you mix funds, even if it's just small change sitting in any of the intermediary/offset accounts

          • neilpatrickharris on 17/10/2018 - 13:05

            @idjces: Thanks for the link, it's very useful. I think my situation will be more so the case under paragraph 65 as there'll be two separate accounts so it'll be clear how funds are proportioned. The issue I have with the bank sending funds to my brokerage account is that it'll require me to immediately purchase shares in order to make the interest tax deductible. I am waiting for the right price to get in and hence wouldn't want to do that immediately. Instead, I'd like to have the account set up so that when the timing comes I'll be able to transfer the cash over to my brokerage account and only start incurring interest from then on out.

  • Tleyx on 16/10/2018 - 22:53
    +1

    Just get a margin loan. You can claim on that. Then use the redraw in the event of a margin call as the situation needs

    • neilpatrickharris on 17/10/2018 - 01:50

      You can't get a margin loan at 100% LTV. The whole purpose of this is to create one synthetically.

  • James tee on 17/10/2018 - 13:04

    What you are talking about is called "debt recycling". Google it.

  • echelon6 on 17/10/2018 - 17:45

    does the redraw count as a new loan? if yes then yes deductible, if no then no deductible

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