Joint equity loan for shares

[vyara87]

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 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.

 

[luap77]

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.

 

[Krusty the Klown]

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.

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.

 

[Grinder]

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,

 

[Krusty the Klown]

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.

 

[Grinder]

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?

 

[ShareGuy]

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

 

[DocK]

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?



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

Which institution is that with Beej?



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.



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.

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....

 

[ShareGuy]

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....

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...

 

[Grinder]

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

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?

 

[Krusty the Klown]

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.

 

[Grinder]

thanks for the reasurance Krusty.