Structuring your finances for the future
The way in which you structure your finances can have a significant impact on your tax position now and in the future.
It is important to ensure that your finances are structured in such a way to maximise the portion of your interest expense that relates to income producing assets while reducing or eliminating personal debt, both now and in the future.
As such, the way you structure your loans should include consideration of:
- Having separate loans for each asset where possible;
- Using offset account(s); firstly, against any personal debt, and then secondly against any debt that may have a changed purpose over the time you hold it;
- When to pay interest only and when interest and principal might be suitable.
These options can all have a significant impact on what will be deductible interest. The best option is to discuss this with your accountant prior to making any substantial changes i.e. purchasing a property or refinancing.
Mary and Fred purchase their first house, with the view of building up equity over the coming years, which will enable them to buy their forever home and rent out their first home.
They borrow $400,000 and diligently pay this off until only $100,000 is owing, when they then purchase a new home and borrow $800,000 for this.
This leaves them with a rental property with a loan with deductible interest on $100,000 and personal debt of $800,000.
Alternatively, Mary and Fred have an interest only loan on their first home, but set-up an offset account to put the funds they would having been paying off their house into, which over time has a balance that builds up to $300,000. This is reducing the interest on their first home while they are living in it and then can be used as the deposit on their forever home when the time comes to purchase this, leaving them with an investment property with a $400,000 deductible loan and a $500,000 personal loan. At this time the offset account is moved to link to this account to ensure future surplus cash reduces the private debt, with an interest rate of 6% and a marginal tax rate of 37%, this would save approximately $6,660 per annum in income tax payable.
PKF Adelaide has in-house mortgage brokers, allowing your accountant to liaise directly with your broker, as we work together to reach a solution that works best for you and your personal situation.