# Joint equity loan for shares



## choobs (7 October 2009)

Hi Guys,

I am intending to open an equity loan for the purpose of investing in shares. My mortgage is in joint names with my wife and hence the bank will only allow us to open the equity loan under joint names.

As I am in the higher tax bracket and have a substantial capital loss to offset any future gains, my intention was to purchase shares using the equity loan under my name so I can claim the interest on the loan as a deduction.

Will it matter when tax time comes around that when I claim interest against the borrowings for shares held in my name that the equity loan is held under joint names?

I will call the ATO and check with an accountant, but wondering if anyone else out there have any comments?

Thanks!


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## Garpal Gumnut (7 October 2009)

choobs said:


> Hi Guys,
> 
> I am intending to open an equity loan for the purpose of investing in shares. My mortgage is in joint names with my wife and hence the bank will only allow us to open the equity loan under joint names.
> 
> ...




I would imagine that you would be considered to have only borrowed half the amount, and thus be only able to claim half the interest if the whole loan was used for buying shares in your name.

I'm no accountant though, and may be wrong.

gg


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## Soft Dough (7 October 2009)

choobs said:


> Hi Guys,
> 
> I am intending to open an equity loan for the purpose of investing in shares. My mortgage is in joint names with my wife and hence the bank will only allow us to open the equity loan under joint names.
> 
> ...




Can't you just draw down on your equity and use the cash to purchase shares?  

If then you wanted a loan in your name, draw down less and take out a margin loan.

If you have substantial money to invest, perhaps ask your accountant about the pros and cons of a family trust.

It may be easier than the brain donor at the bank thinks.


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## Garpal Gumnut (7 October 2009)

Soft Dough said:


> Can't you just draw down on your equity and use the cash to purchase shares?
> 
> If then you wanted a loan in your name, draw down less and take out a margin loan.
> 
> ...




lol

Excellent sentiments on both financial strategy and bankers with which I agree. 

gg


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## choobs (7 October 2009)

Soft Dough said:


> Can't you just draw down on your equity and use the cash to purchase shares?
> 
> If then you wanted a loan in your name, draw down less and take out a margin loan.
> 
> ...




Thanks.

That was what I was thinking...as I will be using less that half of the equity loan to purchase shares it should be considered 100% my portion for taxation purposes.


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## Soft Dough (7 October 2009)

choobs said:


> Thanks.
> 
> That was what I was thinking...as I will be using less that half of the equity loan to purchase shares it should be considered 100% my portion for taxation purposes.




be careful

an equity loan may be different to just drawing down on your homeloan ( not tax deductable ) and then opening up a new loan ( margin loan ) in solely your name.

The bank is probably right wrt an equity loan being in both names as opposed to drawing down cash and then doing with that whatever you want.  Then again I am no accountant so for $50-$100 what does it hurt to check with yours.


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## Krusty the Klown (8 October 2009)

Choobs, in this scenario you can claim 100% of the funds drawn down are for investments in your name only. This is quite legal and is done all the time in a married couple situation.

As long as you don't pollute the equity loan with drawdowns for private purposes it will be 100% deductible.

If the joint loan account was not with your spouse but another person, then it would be more complicated.


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## luap77 (8 October 2009)

First time poster as I'm still very much in the learning process re. investing.

There is a tax ruling concerning exactly this matter, and my understanding of it is that the portion of an equity loan used for the purposes of generating income is fully deductible. Therefore, it appears that an equity loan can be used for personal spending, though naturally this complicates the matter of calculating out what the exact amount would be for the FY. From memory, the ruling does cover this aspect though.

Hope this helps.


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## Krusty the Klown (8 October 2009)

There is a trap when mixing drawdowns using an equity loan for investment and private use, mentioned by the previous poster.

You can claim the proportion used for investment as a deduction, however the trap lies when repayments are made. The trap is calculating the interest, which becomes difficult if the loan used is a line of credit and is used quite often.

When a repayment is made a proportion of private and investment debt is made in proportion, but if after a repayment is made and another private drawdown is made, the proportion for both elements changes and subsequently so does the interest as a deductible claim and must be recalculated constantly. A real headache. Better to structure things separately when starting.

If a principle and interest loan is used calculations can be simple, but beware if using a line of credit equity loan, it would be better to have two sub-loans, one for private use and one for investment.


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## Beej (8 October 2009)

Krusty the Klown said:


> There is a trap when mixing drawdowns using an equity loan for investment and private use, mentioned by the previous poster.
> 
> You can claim the proportion used for investment as a deduction, however the trap lies when repayments are made. The trap is calculating the interest, which becomes difficult if the loan used is a line of credit and is used quite often.
> 
> ...




My advice on this was to do exactly as suggested here - Ie set-up two equity/LOC accounts. The one I use for investment purposes is used ONLY for investment purposes, keeping 100% of all interest charged on the account tax deductible. If any cash is received from those investments (especially capital) it goes back into that loan, keeping things nice and clear and simple for taxation accounting purposes. If you want to re-draw for private purposes, set-up a different facility for that. Under packages like the ANZ break-free, you can have practically as many different facilities (accounts) under the one mortgage as you like.

Cheers,

Beej


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## luap77 (8 October 2009)

Krusty is spot on in explaining the complication regarding the the calculation of deductible interest if a line of credit loan is used for mixed purposes. If I recall correctly, the tax ruling states something to the effect that the calculation can be done on a monthly basis using an opening vs closing balance approach, rather than a tedious daily calculation. I too am of the opinion that a dedicated investment loan (standalone, or as a split sub-loan) would be the cleanest way, though for some people (myself included) such a loan is not always possible to obtain. In such cases, the ongoing calculation of deductible interest (adjusted for the ever-changing personal use component) is a necessary evil. Is anybody here in that situation of using an equity loan for both investing and personal uses?


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## Krusty the Klown (10 October 2009)

luap77 said:


> In such cases, the ongoing calculation of deductible interest (adjusted for the ever-changing personal use component) is a necessary evil. Is anybody here in that situation of using an equity loan for both investing and personal uses?




You do these calculations monthly? Sounds like a real pain, but I suppose if you have no alternative you just have to.

Do yourself a favour and keep meticulous records for the ATO, just in case.


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## Michael Dempsey (14 October 2009)

Have a look at CALIA +.
It's a mortgage and margin lending facility rolled into 1.
The purpose of the facility is to help clients pay down non deduct debt (home loan and other consumer crap) and reborrow to invest into shares, managed funds or property, thereby increasing deduct debt.

You can have up to 12 different sub accounts. 

Lets say you had acc 1 as your portion of the non deduct loan.
Acc 2 your misses portion of non deduct loan.

If you have excess equity, you can put your portion into Acc 3 which can have your name on it and be used for deduct debt.

As you pay down Acc 1, you can increase the debt in acc 3.
You can have acc 4 as a margin loan if you want.

At the end of each month you get a statement.

Each account has it's own BSB and Acc no so they are all seperate. You can have credit card, internet access, over the counter access, debit card access and everything else.

Max LVR is 80%. It's not for everyone but it sounds like it would suite you choobs.

Only available through financial planners. PM me if you want a brochure sent out.


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## Beej (14 October 2009)

Michael Dempsey said:


> Have a look at CALIA +.
> It's a mortgage and margin lending facility rolled into 1.
> The purpose of the facility is to help clients pay down non deduct debt (home loan and other consumer crap) and reborrow to invest into shares, managed funds or property, thereby increasing deduct debt.
> 
> ...




FYI - you can get facilities exactly like this straight from any of the big 4 banks without the need to go through a financial planner. I have this from ANZ and they call it the "Break Free" package, and you can have I think up to 5 separate accounts (each with own BSB/account number etc), and they can be anything from straight P&I loans, to IO loans, to equity manager/re-draw facilities and so on. Create new accounts, loans etc, change limits etc whenever you like at no cost. The other banks all have similar products. There is usually a single yearly fee of a few hundred $$ (which you make sure get's charged in full to a tax deductible account!). You should also make sure you get AT LEAST a 0.6% discount off the standard interest rates. There is usually a gold or platinum credit card etc included in the package at no extra cost.

If you are a fairly financially savvy person and you know how to use/control debt for investment purposes and tax minimisation to your advantage, these packages are 100% the way to go. Of course you have to an asset (house/property) to secure the facility with and a reasonable amount of equity to free up capital for investment purposes.

Cheers,

Beej


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## Knobby22 (14 October 2009)

What about capital gains tax?

The loan would be better split. You cliam less interest but capital gains tax will be greatly reduced. It's the end game that matters.


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## Grinder (14 October 2009)

Beej said:


> FYI - you can get facilities exactly like this straight from any of the big 4 banks without the need to go through a financial planner. I have this from ANZ and they call it the "Break Free" package, and you can have I think up to 5 separate accounts (each with own BSB/account number etc), and they can be anything from straight P&I loans, to IO loans, to equity manager/re-draw facilities and so on. Create new accounts, loans etc, change limits etc whenever you like at no cost. The other banks all have similar products. There is usually a single yearly fee of a few hundred $$ (which you make sure get's charged in full to a tax deductible account!). You should also make sure you get AT LEAST a 0.6% discount off the standard interest rates. There is usually a gold or platinum credit card etc included in the package at no extra cost.
> 
> If you are a fairly financially savvy person and you know how to use/control debt for investment purposes and tax minimisation to your advantage, these packages are 100% the way to go. Of course you have to an asset (house/property) to secure the facility with and a reasonable amount of equity to free up capital for investment purposes.
> 
> ...





Have the same sort of thing from my bank with a yearly fee & also a .7% discount. Your able to borrow against your home loan to use for investing in which the interest is 100% tax deductible, whether the loan is in joint names or not.


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## Krusty the Klown (14 October 2009)

The difference between the CALIA+ facility and most other loans are that the investment sub accounts allow capitalisation of interest and no repayments. Repayments only need to be made on the first loan with the private debt.

These are the loans that Storm Financial investors used.


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## Beej (14 October 2009)

Knobby22 said:


> What about capital gains tax?
> 
> The loan would be better split. You cliam less interest but capital gains tax will be greatly reduced. It's the end game that matters.




I'm not sure I understand your point here Knobby?? The issue of capital gains tax on an investment is usually quite separate from the issue of tax deductability of the interest of other associated funding costs for the investment?



Krusty the Klown said:


> The difference between the CALIA+ facility and most other loans are that the investment sub accounts allow capitalisation of interest and no repayments. Repayments only need to be made on the first loan with the private debt.
> 
> These are the loans that Storm Financial investors used.




You can do exactly that with the big banks multi-account/single security facilities as well. I haven't made a repayment on my tax deductible loan in 2 years. The interest is capitalising there and maximising tax deductions while any non tax deductible loan is paid down ASAP.

I think the Storm loans used something like I am describing, then they leveraged it up again via margin loans against the shares bought with the borrowed money from the mortgage based loan - ie leverage upon leverage! 

Cheers,

Beej


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## Grinder (14 October 2009)

Krusty or others,

Are we saying a sub account is essentially the same as an offset account? If so, when dollars are put back into this account is it perceived as paying back the borrowed amount used for investing?


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## Sir Burr (14 October 2009)

A few years back I withdrew $50K off a joint home loan with my wife.

I claimed the interest portion on the $50K divided by 2.

If the interest rate changed, on that date I calculated the interest at the new rate. Kept a spreadsheet plus bank statements.

While buying and selling shares I kept the money in the brokers account so did not move money back and forth into the home loan, keeping it simple.

Never been audited though and as far as the repayments went (note Krusty the Klown) I did not calculate this (paying back a bit of principle) into a reduced interest claim. Oppps, didn't think of that


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## vyara87 (14 October 2009)

choobs said:


> Hi Guys,
> 
> I am intending to open an equity loan for the purpose of investing in shares. My mortgage is in joint names with my wife and hence the bank will only allow us to open the equity loan under joint names.
> 
> ...




I initially had a joint equity loan and then I read about in the age that the ATO does come down heavy on how you split the interest as you are wanting to claim the interest under your name. In my case we both have share investment accounts thus I asked the bank to create 2 separate loans. 
Therefore in the future if you decide to have a share account under your wife's name as well then you should have a separate loan account. The bank should be able to create a loan account under your own name. Check around with other banks.


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## luap77 (14 October 2009)

Krusty; yep, I do the calculations monthly and it is a mild pain. We are in this situation as we had limited options with regards to securing a loan just after the flow-on from the GFC. 

I've dug out the tax ruling that applies to using a line of credit loan for mixed purposes (personal and income producing). The document is TR2000/2, and is available on the ATO site. It would be great to see some comments here on people's take on this document.


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## Krusty the Klown (16 October 2009)

Beej said:


> You can do exactly that with the big banks multi-account/single security facilities as well. I haven't made a repayment on my tax deductible loan in 2 years. The interest is capitalising there and maximising tax deductions while any non tax deductible loan is paid down ASAP.




Which institution is that with Beej?



> I think the Storm loans used something like I am describing, then they leveraged it up again via margin loans against the shares bought with the borrowed money from the mortgage based loan - ie leverage upon leverage!




That's correct, the margin loan is built in to the CALIA+ facility. It is a home loan and margin loan combined in to the one product.



Grinder said:


> Krusty or others,
> 
> Are we saying a sub account is essentially the same as an offset account? If so, when dollars are put back into this account is it perceived as paying back the borrowed amount used for investing?




From what you are saying the effect on interest is the same, but it is a different thing.

The sub account is actually a loan, like an overdraft or any other line of credit like a credit card. An offset account is a savings or transaction account that contains YOUR cash only. 

In an offset account the cash held in the account earns interest at your home loan interest rate and this earned interest is deducted from your monthly interest charge on your home loan. Because you were not actually paid interest it is not deemed assessable income, which would be the case if you actually had the interest credited to the savings account.

Think of these sub accounts as your whole home loan divided in to 2 or 3 smaller loans that add up to the entire debt. One for your actual home, the other for a boat or whatever private purpose and the third for an investment.


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## Grinder (17 October 2009)

What I'm getting at (unsuccessfully it seems) is if I borrow 10K against my home loan to use for investing, but actually use another 10K that is'nt borrowed funds for investing and instead let the borrowed 10K sit in my offset account, can I still claim a tax deduction saying I'm using the borrwed 10K? or does the ATO consider this paying back the loan?

That way I can claim a tax deduction on borrowed funds as opposed to claiming nothing by using my own funds.

Hope it's making some sense,


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## Krusty the Klown (17 October 2009)

Grinder said:


> What I'm getting at (unsuccessfully it seems) is if I borrow 10K against my home loan to use for investing, but actually use another 10K that is'nt borrowed funds for investing and instead let the borrowed 10K sit in my offset account, can I still claim a tax deduction saying I'm using the borrwed 10K? or does the ATO consider this paying back the loan?
> 
> That way I can claim a tax deduction on borrowed funds as opposed to claiming nothing by using my own funds.
> 
> Hope it's making some sense,




No, the borrowed funds actually have to be used for investment and you need to have a paper trail to prove it if audited.


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## Grinder (17 October 2009)

Thanks Krusty. Whats your take on having a paper trail that leads to borrowed funds been put into a trading account and my own funds been put into the offset?


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## ShareGuy (17 October 2009)

Grinder said:


> What I'm getting at (unsuccessfully it seems) is if I borrow 10K against my home loan to use for investing, but actually use another 10K that is'nt borrowed funds for investing and instead let the borrowed 10K sit in my offset account, can I still claim a tax deduction saying I'm using the borrwed 10K? or does the ATO consider this paying back the loan?
> 
> That way I can claim a tax deduction on borrowed funds as opposed to claiming nothing by using my own funds.
> 
> Hope it's making some sense,




If you have the money just use it. Why go paying the bank interest just to get a tax deduction? 

A tax deduction is not a tax offset. You will be out of pocket by:
Interest deduction x (1 - tax bracket)

The advantage is if your actually using leverage to get higher returns but with your plan your just wanting to pay interest to the bank on your own money to get a deduction...

Be happy to be proven wrong


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## DocK (17 October 2009)

Beej said:


> I'm not sure I understand your point here Knobby?? The issue of capital gains tax on an investment is usually quite separate from the issue of tax deductability of the interest of other associated funding costs for the investment?
> 
> 
> 
> ...






Krusty the Klown said:


> Which institution is that with Beej?
> 
> 
> 
> ...




As an ex-storm financial client I can attest to the fact that you can indeed do what is required through any of the major banks.  Our facility is with CBA under a viridian advantage facility.  We have a home loan, a line of credit, and two investment loans under one facility.  There is a limit for the facility and the amounts of the individual loans within the facility are quite flexible.  Eg, as home loan is repaid (non-deductible interest) the investment loans can be increased provided the entire amount borrowed is within the facility limit.  Storm's advice was generally to capitalise interest, or draw on margin loan for sufficient funds to pre-pay interest on investment loans (same effect).  

The OP possibly is probably better to have his bank write a loan in his name only as he is presumably going to invest in his name only due to capital losses that can be used to offset future gains (hopefully) and he wishes to claim all deductible interest himself.  My understanding from my accountant is that if the loan is in joint names, then the interest costs must be split jointly as well.  There is no reason why his bank shouldn't be able to write the loan in one name but still use the jointly held security - provided his wife signs the appropriate paperwork to show she consents.  May have to go guarantor?  I would suggest if your bank can't handle this - change banks.  

I would be very interested in people's opinions on the following:

If I take out an investment loan for share purchases, and capitalise the interest on it for several years, and use all dividends and capital gains made on the investment to reduce my non-deductible home loan, eventually I will have repaid my home loan but my investment loan will probably be more than the investment is worth (assuming I've sold shares from time to time to take profits).  Does the ato allow this?  Strictly speaking I "thought" that all income earned from an investment, where interest on a loan used to purchase the investment was being claimed as a deduction, had to be applied to reduce the investment loan??   Seems to be too much to my advantage otherwise, and the ato doesn't often work to my advantage....

Hope the above makes sense - I know what I'm trying to say....


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## ShareGuy (17 October 2009)

DocK said:


> As an ex-storm financial client I can attest to the fact that you can indeed do what is required through any of the major banks.  Our facility is with CBA under a viridian advantage facility.  We have a home loan, a line of credit, and two investment loans under one facility.  There is a limit for the facility and the amounts of the individual loans within the facility are quite flexible.  Eg, as home loan is repaid (non-deductible interest) the investment loans can be increased provided the entire amount borrowed is within the facility limit.  Storm's advice was generally to capitalise interest, or draw on margin loan for sufficient funds to pre-pay interest on investment loans (same effect).
> 
> The OP possibly is probably better to have his bank write a loan in his name only as he is presumably going to invest in his name only due to capital losses that can be used to offset future gains (hopefully) and he wishes to claim all deductible interest himself.  My understanding from my accountant is that if the loan is in joint names, then the interest costs must be split jointly as well.  There is no reason why his bank shouldn't be able to write the loan in one name but still use the jointly held security - provided his wife signs the appropriate paperwork to show she consents.  May have to go guarantor?  I would suggest if your bank can't handle this - change banks.
> 
> ...




You can do whatever you want with income from an investment... 

Try thinking of shares as a business, the ato can't tell you what to do with the profits from a business...


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## Grinder (17 October 2009)

ShareGuy said:


> If you have the money just use it. Why go paying the bank interest just to get a tax deduction?
> 
> A tax deduction is not a tax offset. You will be out of pocket by:
> Interest deduction x (1 - tax bracket)
> ...




No I won't be out of pocket. If I just use my 10K then sure I won't pay any interest on it, but if i use the banks & let mine sit in the offset the interest is theoretically elimanted as I have the same amount sitting in the offset that I would have borrowed. The benefit is claiming a tax deduction against the supposed interest incurred. Why not take advantage if you can?


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## Krusty the Klown (18 October 2009)

Grinder said:


> Thanks Krusty. Whats your take on having a paper trail that leads to borrowed funds been put into a trading account and my own funds been put into the offset?




Thats fine, totally deductible.

Your last post makes sense too.


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## Grinder (18 October 2009)

thanks for the reasurance Krusty.


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