{"id":988,"date":"2014-08-11T06:28:42","date_gmt":"2014-08-11T06:28:42","guid":{"rendered":"http:\/\/www.prosolution.com.au\/?p=988"},"modified":"2018-03-10T09:04:15","modified_gmt":"2018-03-09T23:04:15","slug":"save-tax-loan-structuring","status":"publish","type":"post","link":"https:\/\/wealthcoach.com.au\/stage\/save-tax-loan-structuring\/","title":{"rendered":"Save tax through successful loan structuring"},"content":{"rendered":"

\"Save<\/a><\/p>\n

How you structure your loans can have a large impact on the tax you pay, your risk, your ability to build wealth, your cash flow and your general financial strength. Efficient loan structuring is a commonly overlooked and rarely understood topic but that\u2019s not to say it\u2019s overly complex. Like anything, you don\u2019t know what you don\u2019t know until you know it. Many people tend to carry a reasonable amount of (investment) debt throughout their working life so it\u2019s especially important for you to ensure your mortgages are your servant, not your master. You can save a lot of tax by optimising your loan structure.<\/p>\n

This article will highlight some of the common strategies and structures that are useful for investors to consider employing. You can use it as a bit of a checklist to see if you are optimising your loan structure. But a word of warning \u2013 this article obviously does not take into account your circumstances so please seek professional credit and\/or tax advice before making any changes to your loans.<\/p>\n

Loan structure # 1: Always borrow the maximum and use an offset<\/em><\/strong><\/h3>\n

The first thing to be very mindful of is that you typically only have one opportunity to crystallise the maximum tax deductible<\/a> loan in respect to a property. That is, when you first purchase it. You cannot contribute cash and borrow a lower amount when you purchase a property and then subsequently increase the loan later on (as the purpose\/use of the additional funds will determine whether the loans are tax deductible or not). The second thing to keep in mind is that time and time again it is demonstrated to me (through dealing with hundreds of clients) that there is one thing that doesn\u2019t change in life and that is change itself. Therefore, you will do yourself a great service to structure your finances to give you as much flexibility as possible.<\/p>\n

Borrow maximum: case study<\/em><\/h3>\n

Let me explain using an example; Dr Smith purchases an investment property for $500,000. He has repaid his home loan and has no other debt. Dr Smith has $190,000 of cash savings to contribute to the investment. He has two options; ignoring costs for this example, he can borrow what he needs being $310,000 ($500k less $190k cash) or he can borrow $500,000 and deposit $190,000 in a linked offset account. The latter option won\u2019t cost him any more as the bank will only charge interest on the next balance of $310,000.<\/p>\n

Dr Smith can still access the $190,000 cash savings at any time. For example, if a few years after purchasing the property Dr Smith decides to undertake some renovations to his home costing approximately $100,000, he can withdraw this amount from the offset. Of course, because the balance in the offset has reduced, his interest bill will increase but all the interest will be tax deductible. If he had not have structured his loan with an offset, he would have had to borrow the $100,000 for the renovations and the interest on that loan would have not been tax deductible. In summary, it is nearly always the best approach to borrow the full cost of a property and deposit cash in the offset.<\/p>\n

Loan structure # 2: Always interest only<\/em><\/strong><\/h3>\n

In keeping with the previous sub-heading, this tip also relates to preserving future tax benefits and maximising your flexibility. Structuring your loan repayments as interest only (and not principal and interest) provides the following benefits:<\/p>\n