# Using line of credit to invest in shares: tax question



## Some Guy (31 January 2020)

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?


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## Knobby22 (31 January 2020)

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.


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## Austwide (1 February 2020)

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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## bonox (1 February 2020)

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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## Some Guy (1 February 2020)

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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## frugal.rock (1 February 2020)

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 
F.Rock


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## Value Hunter (1 February 2020)

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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## So_Cynical (1 February 2020)

Record keeping is super important what ever mix you use.


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## kahuna1 (1 February 2020)

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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## Toyota Lexcen (2 February 2020)

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.


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## Some Guy (2 February 2020)

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.




kahuna1 said:


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


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## Some Guy (2 February 2020)

kahuna1 said:


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



Also no SMF.


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## frugal.rock (2 February 2020)

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


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## kahuna1 (2 February 2020)

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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## investtrader (3 February 2020)

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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## Knobby22 (3 February 2020)

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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## kahuna1 (3 February 2020)

investtrader said:


> I actually think the opposite.




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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## frugal.rock (3 February 2020)

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.



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


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## bonox (3 February 2020)

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.




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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## Toyota Lexcen (3 February 2020)

Knobby22 said:


> 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.




Good information, 

Probably wont be negatively geared either


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## Knobby22 (3 February 2020)

Toyota Lexcen said:


> Good information,
> 
> Probably wont be negatively geared either



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%.


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## cutz (3 February 2020)

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.




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 ??


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## kahuna1 (4 February 2020)

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


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## investtrader (4 February 2020)

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.


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## investtrader (4 February 2020)

... 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.


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## sptrawler (4 February 2020)

investtrader said:


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



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


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## dyna (4 February 2020)

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.


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## Austwide (4 February 2020)

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.
> 
> ...




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.


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## kahuna1 (4 February 2020)

investtrader said:


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




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.


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## Knobby22 (4 February 2020)

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.


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## HelloU (5 February 2020)

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.



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)


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## Some Guy (5 February 2020)

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.


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## KD2560 (6 February 2020)

Toyota Lexcen said:


> Good information,
> 
> Probably wont be negatively geared either



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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## Some Guy (7 February 2020)

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 ?




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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## KD2560 (7 February 2020)

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.



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.


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