# Cashbonds

#### handyandy

Hi Steve

Whats the details on a cashbond?? How does it work?

Cheers

Originally posted by Steve Navra
Buy an income stream for five years (cashbond) with the \$27,777 will yield \$6055 per annum.

Less Expenses: \$500 + cost of using the 'idle' \$27,777 at 6%; \$500 + \$1667 = \$2167 per annum.

What happens after 5 years? The income stream finishes, and you still have an I/O loan for \$27777 costing you \$1667 a year?

Is this correct? Am I missing something?

Hi Handy & Apocalypse,

Info on cashbonds see my website: www.navra.com.au

Apocalyse, you miss nothing:

At the end of the five years you will still owe the \$27,777.
(But you will have enjoyed a fabulous 5 years!)

Property value \$222,222
Assuming capital growth at 5% pa, the property will be worth \$283,617 by the time the cashbond runs out. (5 years)

80% of \$283,617 = \$226,893 - existing loan of [\$150,000 + \$27,777] = \$49,116

New Cashbond of \$49,116 = \$10,707 pa for the next 5 years.

Expenses = cost of the two cashbond loans [\$27,777 + \$49,116] = \$4614 pa

New passive income \$10,707 - \$4614 = \$6093 pa for the next five years.

Not a bad form of indexing!!

This structure works exceptionally well, but relies on the assets achieving CAPITAL GROWTH.

Regards,

Steve

Ahh, cashbonds

Greetings Steve, and thank you for this explanation of a cashbond at work. Two things:

1. On your website I understood you argued that the income from the Cashbond really should be directed to paying off the loan. But in this case no...?

2. Having looked at your website and still been confused, are you able to share a few more examples of how your cashbond solution makes a big contribution. Or is that revealing all your secrets?

Regards,
Luke

hi F.P i suggest u get along to the seminar.
.u wont find better value \$250/2 days.
all will be revealed for u very clearly re cashbonds and lots more.

cheers Darren.

I'd agree with that- it's DEFINITELY worth it.

Sorry, I won't pretend to answer in a few sentences something that takes Steve a weekend to expand in full.

I read all articles Steve had sent out- and I still had trouble coming to grips with it before the seminar.

Hi All,

Sincerely, the topic of cashbonds does require an intricate explanation, together with many practical examples.

I spend a many hours each course going over the concept - an in depth forum explanation would be mega long . . .

Also, I am always loath to issue any advice of this nature through the forum medium: I really need an in depth understanding of a clients circumstances before recommending sophisticated structure.

So, I am NOT holding back on you

Attend a course; by all accounts they are good value and we have a lot of fun exploring ways of enhancing the acquisition of our fav assets!

Regards,

Steve

If the banks are stupid enough to believe the 5 year cashbond, maybe they would believe the 1 year cashbond. ie buy a \$30,000 pa income stream for 1 year at a cost of \$27,777.

Hey Stirling,

Are the banks stupid??

Okay, okay 'nuff said, but consider this:

The cashbond income is guaranteed for the five years, which makes them VERY comfortable, whereas your personal income could end at any minute! (Insolvency, fired, retrenched, sick, dead et al)

One year bond - genarally not and only because it is too short a time period to rely on, regarding the necessary capital growth on the property.

You tick the boxes - the bank makes the final call!

Regards,

Steve

Hi Steve,

Dealing with a number of lending institutions I guess this changes almost on a daily basis for you, but the 1 year option was interesting........

When you refer to the lending institution(stupid or otherwise ) requiring a 5 year bond, is this the case if it was just to support a Lo-Doc type loan as well? ie. Is the 5 year requirement only for a 'standard' type loan or to support a Lo-Doc type loan as well?

Hi Al,

Lo Docs will accept a 1 year bond.
Simply, at the point of signing the application you must be able to declare that the income exists / or is certified to exist in order to make a valid and honest assertion.

However, it comes back down to what is from a risk point reasonable. Is one comfortable to structure on this basis given that future value is uncertain. So, is one year enough to be confident that you will have accrued some capital gain on the property??

The longer the term the greater the prospect of being in positive territory is. Risk management et al.

Regards,

Steve

Thanks Steve.

Two other questions....

Firstly.....

For the interest on the loan to purchase the Cashbond to be tax deductible you may have to PROVE to the ATO at some stage it was used for investment purposes. In this case, to provide an additional income stream to allow additional borrowing should be seen as deductible.

My question is, if the ATO ever queried this, how would you PROVE that the FULL income stream was actually required by the lender to get loan approval in this particular loan application case?

On many loan applications you are also required to state the value of your car, furnishings etc. that in a borderline loan approval may get you the nod. It unfortunately doesn't mean that any borrowings on the car and furniture are tax deductible even though they may have 'contributed' in some way to you achieving a loan approval for investment purposes in this particular case. Therefore, just because I state an income or asset on an investment loan application and the loan application is subsequently approved presumably doesn't make everything in my application tax deductible.

So if you obtain a ruling that does allow the structure, I guess you MAY(?) still need to have some sort of separate/official/additional supporting documentation from the LENDER that stated, in this particular case, the full income from the cashbond was used to provide serviceability to the loan application.

See what I mean Steve? My friendly(?) local Tax Inspector rings me up and says "Why have you claimed this interest as tax deductible?". I say "I have a ruling that states my structure is fine". He/she says "the structure is fine but in this case, you prove to me that the bank required that FULL borrowing to achieve this particular loan approval".

I guess what I'm really asking is, to cover the above situation, should you then get an additional letter from the lender at the time of loan approval, stating that the annuity income stream was fully utilised in the investment loan assessment. Otherwise, how could you prove it? Also, would most lenders provide this?

For your own reasons(?) you may take out an initial loan to purchase a Cashbond larger than that is required to meet the serviceability requirements of the investment loan. I would then imagine that the ATO would want to apportion only that part of the loan that was required to meet the serviceability requirements as tax deductible. But again, how would you be able to prove what proportion of the annuity that the bank used towards granting your investment loan approval?

Secondly......

If after acquiring a Cashbond to provide increased serviceability for investment purposes(and you do use it for this purpose), you decide to 'cash it back in'; would the penalty costs incurred in doing this normally be viewed by the ATO as tax deductible as well?

Sorry Steve. Promise I'll leave you alone after these. It's a fascinating topic!

Hi Alan

Maybe it's late (and I've gotten complacent in my old age), but your question reads like you're looking for reasons to not deduct the interest. Commercial considerations means I don't go looking for additional documentation just in case the Commissioner doesn't like my answers. You may have experience in this regard.

Would you have to prove that all the expenses of a restoration were required to achieve a rental return (or increased valuation) on a property?

Do I need to prove that 100% of my employees time is spent on "business". Could the Commissioner deny 15 mins per day that my staff spend on coffee breaks? Maybe but there'd be revolution.

Surely there must be a case for normal business practice.

I often ask myself, "How would IBM implement this investment/policy". If IBM could conceivably do something then maybe I should consider deducting it too.

Then again I could be naive at this time of night.

Regards

Paul Zag
Dreamspinner

I may be missing something here but isnt all interest deductable when used for income producing uses? Cashbonds provide income so property or no property you can claim a deduction......right?

Paul,

I take your point. Many years ago I shared a house with a Tax Inspector, so just call me cautious(ok....probably overly cautious.......oh all right.....have it your way.......ridiculously cautious ) when it comes to providing documentation that the ATO may require years down the track. He used to tell me some 'interesting', nay, terrible stories.

I don't doubt Steve's process at all and think it's a great idea. However, since it's a little different, I was just asking, based on his experience, whether any additional documenation was ever required. The answer is probably "no" but my poor old head often has trouble understanding the way the tax system works. Steve is the first to admit he enjoys the 'education' side so he's probably used to, what may be, a silly/basic question.

Let me put it this way, suppose you were to take out a Cashbond for \$300K which returned you \$66K per year over 5 years. You apply for an investment loan using this figure and it's approved. However, it's not really a huge loan you are after and in fact the income from a \$150K Cashbond may have been sufficient to get the Loan Approval. You claim the interest on the entire \$300K as that's what you've used on the application, even though it might have only been an income stream from \$150K that was required to achieve the loan. You could then, theoretically have a Tax Deductible loan of \$300K that in part was being used for non-investment purposes.

Thanks in advance for what may well be a basic question.

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