Joint equity loan for shares

[choobs]

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!

 

[Garpal Gumnut]

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!

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

 

[Soft Dough]

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!

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.

 

[Garpal Gumnut]

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.

lol

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

gg

 

[choobs]

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.

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.

 

[Soft Dough]

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.

 

[Krusty the Klown]

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.

 

[luap77]

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.

 

[Krusty the Klown]

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.

 

[Beej]

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.

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

 

[luap77]

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?

 

[Krusty the Klown]

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.

 

[Michael Dempsey]

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.

 

[Beej]

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.

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

 

[Knobby22]

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.

 

[Grinder]

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

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.

 

[Krusty the Klown]

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.

 

[Beej]

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?

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

 

[Grinder]

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?

 

[Sir Burr]

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