Investment loan setup

[bonkerrs]

I have a scenario that I need assistance with. Maybe, some of you guys have a similar setup.

I have an investment loan of 100,000 that I trade from. So you could imagine there is constant money movements - going into and coming out.

After some trading, there is 50,000 of which 10,000 is profit (there is still 60,000 on the market in open positions).

I want to take out 10,000 to put into my mortgage, but if I do that then I will be paying 10,000 more in loan interest repayments… Right?

Even though this is technically profit. It will become an issue with claiming it as a tax deduction? I should still be able to claim as deduction? How can I draw money out?

I track my profit/loss and trading activities on a spreadsheet, I know exactly what is happening with each trade. And besides that, Comsec also has pretty good statements that are downloadable (I’m sure the guys here that use Comsec already know this).

I still haven’t taken any money out for personal use because I’m not sure what will happen to interest payments/tax deductions. I’m really hoping to get some guidance so I can whack a chunk into the ‘bad’ debt.

 

[Krusty the Klown]

If you draw down funds for personal use the interest incurred will not be deductible.

To work out how much is deductible and how much is not, express the $10K as a percentage of the balance of the business loanafter the drawdown. Lets say it works out to be 15%, then you can claim 85% of the interest as a tax deduction.

You will have decreased your mortgage by $10K, but increased another debt facility by the same amount. So there will be no change in your overall debt levels.

It's doable, it just adds more calculations when doing your tax.

Maybe you could divert the proceeds from a trade or two in to another account on settlement and then put this on the mortgage, this way it does not pollute the business loan.

 

[Krusty the Klown]

P.S. just make sure that the amount you take out as cash does not exceed your profits, otherwise you will be using deductible funds to pay down your home loan, obviously the ATO would not like this.

 

[bonkerrs]

Maybe you could divert the proceeds from a trade or two in to another account on settlement and then put this on the mortgage, this way it does not pollute the business loan.

Nice word to explain "pollute" - suits very well! Interesting solution, I'll have to call Comsec to see if they can do this. Does sound very complicated though.

 

[Krusty the Klown]

Yes, it is a bit fidgety, you would have to change the settlement account with Commsec, do the trade, when the funds have been received, change the settlement account back to the loan.

 

[kincella]

I am not familiar with what appears to be (in this case) a complicated investment loan.
All I know is, many of my friends have taken out loans to buy shares.....a straight forward loan...lets say 100k...they drawdown the loan and buy the shares....

they sell shares and take the profit.....they choose to apply the profit in any way that suits them...take a holiday, put money back into a home loan, waste it on the kids....

then they will buy more shares to replace the original shares sold....
so keeping the investment loan safe with onlybeing applied to investments...
and of course retaining the ability to claim 100% interest deductiblity for tax purposes...

at the end of the year...they report their profits and losses for tax purposes...

if there was a period when cash was idle..it would be in an interest earning account...
nothing complicated about that....
so I would have to wonder why anyone would take on a loan that is not straight forward as above

 

[Krusty the Klown]

I am not familiar with what appears to be (in this case) a complicated investment loan.
All I know is, many of my friends have taken out loans to buy shares.....a straight forward loan...lets say 100k...they drawdown the loan and buy the shares....

they sell shares and take the profit.....they choose to apply the profit in any way that suits them...take a holiday, put money back into a home loan, waste it on the kids....

then they will buy more shares to replace the original shares sold....
so keeping the investment loan safe with onlybeing applied to investments...
and of course retaining the ability to claim 100% interest deductiblity for tax purposes...

at the end of the year...they report their profits and losses for tax purposes...

if there was a period when cash was idle..it would be in an interest earning account...
nothing complicated about that....
so I would have to wonder why anyone would take on a loan that is not straight forward as above

That's another simpler way to do it for sure. Negative gearing idle cash in a bank account!!!

An interesting consideration for your friends' situation would be if the funds were fully drawn, but not used to hold shares at some point in time - if the funds were sitting in an account not earning interest (ie assessable income) would the interest for the loan for that period still be deductible? I don't think so.

Just thinking out loud.

 

[kincella]

of course it would krusty....my friends have periods when there is nothing that appears attractive to them..so they wait it out...so long as the funds are not being used for private reasons...nothing wrong with that...
most see it this way...they expect to earn dividend income to offset the interest expense...at the same time to make a few trades and some capital profits..but eventually build up a nice portfolio
one has been doing the above for quite a few years now....had a portfolio of over 500k...before the crash....she pays back portions of the loan with profits
if she is sitting on a profit of 10k with a stock...she might only sell sufficient shares to recoup a portion of the profit...
most of them are into building their portfolio using leverage...and a simple and easy loan to look after...
not the complications you seem to be talking about........

 

[bonkerrs]

So they get an investment loan (say 100k in your example) then move it all to an interest earning account and trade from there? And the interest they pay from the investment loan is 100% tax deductible... as well as earning some interest in that account (whatever is not used in the share market). This way the investment loan is nice and tidy and any interest for tax reasons is easy to account for.

 

[Krusty the Klown]

So they get an investment loan (say 100k in your example) then move it all to an interest earning account and trade from there? And the interest they pay from the investment loan is 100% tax deductible... as well as earning some interest in that account (whatever is not used in the share market). This way the investment loan is nice and tidy and any interest for tax reasons is easy to account for.

Yes that's right, Kincella is talking about a principle and interest loan, as opposed to a line of credit, which sounds like you have.

Kincella is right too, in regard to my question, if funds are sitting idle in an interest earning account the loan interest would still be deductible as long as the cash is available to trade and not used personally.

You could refinance your existing loan into a P & I loan to achieve this, just open a cash account and settle all trades to that.

 

[kincella]

I said nothing about a P & I loan....it matters not how the loan repayment is structured...its how the loan is used and applied....
friends mainly use a line of credit or equity....and the accounts can sit idle for months at a time....while they choose their stock picks very carefully...
it works the same if you were day trading or trading weekly or monthly...

a loan is a loan...its the interest rates you should be looking out for...oh and the ability to obtain the loan in the first place....and then to service it...

sounds like some of you get into complex things..you dont understand....
the saying...KISS...keep it simple stupid.....should be your motto with all things financial...
and if you are smart enough to make profits...you take profits whenever you like...just remember the tax is due later on...

 

[bonkerrs]

I said nothing about a P & I loan....it matters not how the loan repayment is structured...its how the loan is used and applied....
friends mainly use a line of credit or equity....and the accounts can sit idle for months at a time....while they choose their stock picks very carefully...
it works the same if you were day trading or trading weekly or monthly...

a loan is a loan...its the interest rates you should be looking out for...oh and the ability to obtain the loan in the first place....and then to service it...

sounds like some of you get into complex things..you dont understand....
the saying...KISS...keep it simple stupid.....should be your motto with all things financial...
and if you are smart enough to make profits...you take profits whenever you like...just remember the tax is due later on...

My loan is an LOC. Nothing complex about it, I'm just wanting to work out how to use the profits (drawdown) without complicating things comes tax time. Anyway, I'm pretty sure what you're getting at is something like below?

A scenario:
I put all 100K of my LOC investment loan (interest rate 8%) into an ANZ ETrade Investment Cash account that pays 2% interest. For tax reasons I can claim 100% of the interest I pay (8%) because in the eyes of the ATO it is an investment... they are not interested in the fact that I only receive 2% but am paying 8%. This will work for me (and your friends) because the 8% is 100% tax deductible and I can buy and sell shares as I wish and use any profits from the trading without having to account for it because it is no longer in the investment loan account.

Does that sound about right?

 

[nathanblack]

yes, thats correct. i had a margin loan through commbank that operated like that.

1. margin loan account
2. interest paying offset account.

the 2 accounts are linked, so that the interest earned on one offsets the interest payed on the other. and both accounts are used to calculate portfolio LVR.

the margin loan was interest only. i chose to pay interest rather than have it added to the loan.

when making withdrawls from interest bearing account my only concern was:
1. LVR after withdrawl was still allowable
2. portfolio + cash > loan amount. so that i cant be accused of using borrowed funds for personal reasons. But the LVR basically ensures you have some personal money in your account anway(max 70% borrowed, 30% personal).

with the maximum 70:30 loan, 2 things can happen:
1. portfolio goes down. your asked to top up with more personal cash to keep the ratio 70:30. when shares rebound you can redraw that amount.
2. shares go up. you now have an opportunity to take some of your 30% back.

 

[bonkerrs]

I put all 100K of my LOC investment loan (interest rate 8%) into an ANZ ETrade Investment Cash account that pays 2% interest. For tax reasons I can claim 100% of the interest I pay (8%) because in the eyes of the ATO it is an investment... they are not interested in the fact that I only receive 2% but am paying 8%. This will work for me (and your friends) because the 8% is 100% tax deductible and I can buy and sell shares as I wish and use any profits from the trading without having to account for it because it is no longer in the investment loan account.

Does that sound about right?

Been thinking on this... Would I still have to report (for tax return) the money in the interest bearing account if I use it for personal reasons because I have to account for the interest I've earned? If so, this brings me back to square one of my original concern. Or am I confusing myself?

Really would like to draw some money but want to sort this out first!

 

[nathanblack]

Been thinking on this... Would I still have to report (for tax return) the money in the interest bearing account if I use it for personal reasons because I have to account for the interest I've earned? If so, this brings me back to square one of my original concern. Or am I confusing myself?

Really would like to draw some money but want to sort this out first!

all interest earned needs to be declared. wether the account is personal or investment. even your everyday saving account you declare interest earned come tax time. but its simple because they send you a statement, no calculations required.

but seriously your over thinking it anyway. as long as your portfolio > loan, then some portion of your portfolio is your personal money and has nothing to do with your loan or interest payable on that loan. so aslong as the loan/bank allows you to sell, ie leverage and security, than its a non issue. with a margin loan as your shares go up, the bank allows you to borrow more based on the increased value of shares versus loan amount.

if you want to cash out some of the portfolio , you simply make a request to the bank and the funds are made available for withdraw the following business day.