Cashbonds for Dummies
- Thread starter rj
- Start date
I guess it depends how much equity you have and what your future plans are. Lodocs are getting cheaper and cheaper though...
The way I see it, and someone can correct me if I'm wrong, is that cashbonds cost about 2 or 3% (being your loc rate minus the rate you get on the CB), and lodocs these days cost about 0.5 - 1% over the vari rate...
The way I see it, and someone can correct me if I'm wrong, is that cashbonds cost about 2 or 3% (being your loc rate minus the rate you get on the CB), and lodocs these days cost about 0.5 - 1% over the vari rate...
i posted this elsewhere as have been churning for a while.
i note that australian capital reserve advertise 8% interest on their investments over $20k paid quarterly or compounded and paid annually. what is to stop anyone borrowing $100k loc at 7% locked for 1-5 years and investing in these? that way the income from the interest is higher than the interest paid on the loc ...
thoughts from anyone who knows more than i (which will be most of you) ...
p.s. great thread - i now understand cashbonds, although, from what i gather, nodoc's may kill them off as a cashflow source.
i note that australian capital reserve advertise 8% interest on their investments over $20k paid quarterly or compounded and paid annually. what is to stop anyone borrowing $100k loc at 7% locked for 1-5 years and investing in these? that way the income from the interest is higher than the interest paid on the loc ...
thoughts from anyone who knows more than i (which will be most of you) ...
p.s. great thread - i now understand cashbonds, although, from what i gather, nodoc's may kill them off as a cashflow source.
Hi all,
Lizzie, the real reason why they would pay you 8% when you can borrow for 7%, is that no bank will lend them money for 7% because of the risk. So you have to ask yourself, do you want to make 1% on a deal that a bank thinks is too risky to make 7% on???
Oh and by the way can anyone tell me how to spell Westpoint?? I've heard that you can get a very good financial return from them using borrowed money. It must be true, my licenced financial adviser told me so.
bye
Lizzie, the real reason why they would pay you 8% when you can borrow for 7%, is that no bank will lend them money for 7% because of the risk. So you have to ask yourself, do you want to make 1% on a deal that a bank thinks is too risky to make 7% on???
Oh and by the way can anyone tell me how to spell Westpoint?? I've heard that you can get a very good financial return from them using borrowed money. It must be true, my licenced financial adviser told me so.
bye
Bill.L said:Oh and by the way can anyone tell me how to spell Westpoint?? I've heard that you can get a very good financial return from them using borrowed money. It must be true, my licenced financial adviser told me so.
bye
Good call Bill!
Due diligence has to be on the forefront of all our investment transactions
and great explainations on the cashbond Rixter!
Certainly leaves room for thought as the serviceability wall comes closer.
We'll all have to eventually consider the options.
Great thread, I know what cashbonds are now.
One question tho,
If I were trying to legitimately shift non deductable debt to deductable would the following be fast and cost effective?
Take out $100K LOC to purchase 5 year $100K cashbond. LOC interest, say, 7% and Cashbond 5%.
Use income from cashbond to pay interest on LOC only and the rest pay into an offset account which is attached to your PPOR loan. The offset account builds up very quick reducing your non-deductable debt. Whilst you can claim the interest on $100K LOC.
Do you see any problems, inefficiencies with this? Would I be gaining ground or losing?
Cheers,
Damon
One question tho,
If I were trying to legitimately shift non deductable debt to deductable would the following be fast and cost effective?
Take out $100K LOC to purchase 5 year $100K cashbond. LOC interest, say, 7% and Cashbond 5%.
Use income from cashbond to pay interest on LOC only and the rest pay into an offset account which is attached to your PPOR loan. The offset account builds up very quick reducing your non-deductable debt. Whilst you can claim the interest on $100K LOC.
Do you see any problems, inefficiencies with this? Would I be gaining ground or losing?
Cheers,
Damon
Yea, I may well be better doing that, and until I read about the cashbonds I was set to gear into some shares. (have them picked out all ready to roll )
I guess my only concern is the difference is in the risk you take on the investment.
Sure, I'd be happier to invest in the funds you mentioned and get those high returns, but as with any investment, higher returns generally means a higher level of risk. And when youre gearing the investment thats an extra layer of risk.
Im just exploring the ways to cost and tax effectively, transfer non-deductable funds to deductable fast as possible. If cashbonds can do it, at what risk? On the outset it looks minimal, so wheres the drawback?
Just trying to compare risk, cost, time between using cashbonds or using a share portfolio to achieve this.
Unfortunetly my knowledge on cashbonds is limited but I'll run some figures and post back to see whether im on the right track or completely up the creek. Or maybe cashbonds are a waste of time for trying to transfer non-deductable to deductable?
Cheers,
Damon
)I guess my only concern is the difference is in the risk you take on the investment.
Sure, I'd be happier to invest in the funds you mentioned and get those high returns, but as with any investment, higher returns generally means a higher level of risk. And when youre gearing the investment thats an extra layer of risk.
Im just exploring the ways to cost and tax effectively, transfer non-deductable funds to deductable fast as possible. If cashbonds can do it, at what risk? On the outset it looks minimal, so wheres the drawback?
Just trying to compare risk, cost, time between using cashbonds or using a share portfolio to achieve this.
Unfortunetly my knowledge on cashbonds is limited but I'll run some figures and post back to see whether im on the right track or completely up the creek. Or maybe cashbonds are a waste of time for trying to transfer non-deductable to deductable?
Cheers,
Damon
thedude said:disregard, my head was very heavy at the time of posting before
Thanks all
Damon
Damon,
You wouldnt have been able to claim a deduction in the first instance anyway. The purpose of the cashbond has to be for income producing purposes, ie you needed a CB to allow you to keep borrowing to purchasing Investment property. - Not as in your intent to shift deductability.
In the ATO's eyes its the purpose or intent for the borrowings thats determines deductability or not.
Hope this helps.
Rixter said:
Hi Rixter,
Correct me if im wrong, but i thought it was the purpose of the loan has to be for income producing purposes not the cashbond?
I assume the cashbond is deemed an investment by the ATO and therefore interest on borrowed funds to buy one would be deductable.
I dont think ive got the cashbond thing down yet
Cheers,
Damon
thedude said:Hi Rixter,
Correct me if im wrong, but i thought it was the purpose of the loan has to be for income producing purposes not the cashbond?
I assume the cashbond is deemed an investment by the ATO and therefore interest on borrowed funds to buy one would be deductable.
I dont think ive got the cashbond thing down yet
Cheers,
Damon
The CB is needed to allow you to keep borrowing for income producing purposes ie IP. Therefore the borrowings to purchase the CB (that then in turn allows you to borrow to purchase IP) becomes deductable.
Does this explain it better?
Umm, nearly. Sorry, I just really want to understand this.
Disregarding what you use the cashbond income for. Is a Cashbond an investment that the ATO would say, "yes, this is an investment".
If so, borrowings to buy the cashbond would be tax deductable? Just like borrowings to buy an IP, shares, business etc would be tax deductable?
If its not deemed an investment by the ATO, and the ATO says "You must use the income from a Cashbond for investment purposes", then yes, i think i get it.
Cheers,
Damon
Disregarding what you use the cashbond income for. Is a Cashbond an investment that the ATO would say, "yes, this is an investment".
If so, borrowings to buy the cashbond would be tax deductable? Just like borrowings to buy an IP, shares, business etc would be tax deductable?
If its not deemed an investment by the ATO, and the ATO says "You must use the income from a Cashbond for investment purposes", then yes, i think i get it.
Cheers,
Damon
Hey Damon,
You'd basically need to prove that you wouldnt have been able to get the new IP loan without the cashbond. If you apply for the CB via Navra or his company, I believe they sort all this out with the private ruling they've obtained. As long as it's ascertained that the cashbond was absolutely necessary to get the new IP loan, the distributions from it can be used however you wish - ie business or personal expenditure.
IMHO, just get a lodoc loan and avoid all the hassle. It's a cheaper alternative, too.
You'd basically need to prove that you wouldnt have been able to get the new IP loan without the cashbond. If you apply for the CB via Navra or his company, I believe they sort all this out with the private ruling they've obtained. As long as it's ascertained that the cashbond was absolutely necessary to get the new IP loan, the distributions from it can be used however you wish - ie business or personal expenditure.
IMHO, just get a lodoc loan and avoid all the hassle. It's a cheaper alternative, too.
thedude said:
Damon,
I personally cant see the ATO allowing deductions on interest from borrowings to purchase a CB as an investment by itself.
Why would you do that from a investment viewpoint when the investor would be making a cashflow loss due to the differences between your borrowing costs & CB returns rate. Theres no point to it as a "cash" investment.
A CB's main purpose is to provide you a guarranteed income over a set term period which you bought using a lump sum deposits via a superannuation roll over or some other "cash" deposit etc etc. Its not designed to be geared.
I would sugggest you ask the ATO direct and get straight from the horses mouth so to speak.
I obtained a copy of a written ATO private ruling prior to my CB purchase that states deductability is allowable for my intent.
Hope this helps better.
dtraeger2k said:
I agree with Dt a lo doc is a cheaper alternative however a lo doc cant be used to service expenses, where as your equity coming back to you via the CB can, as well as increase your borrowing capacity.
A Lo doc is definatively a cheaper tool to use providing you have sufficient existing cashflow to cover IP expenses.
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