Prepaying Interest & LOC

[lenojd]

I would like to get some thoughts and views about whether I am overcomplicating things here.

My objective is as follows:
a) Increase my tax deductibility in FY15 (i.e. this year).
b) Retain the greatest amount of my own cash as possible.

My motivation is as follows:
a) I?m going to have a high tax bill this year and will likely have a lower bill next year (will have more deductable next year and will be negatively geared).
b) I want to work on keeping my cash liquid and for when/if I ultimately decide to put it towards a PPOR (via offset) to minimise non deductable debt. My strategy is to buy/hold so I want to avoid selling down the line to free up funds to offset non deductable debt.

So what I am thinking of doing:

(A) To maximise deductable debt this year:
Prepay interest this financial year for a component of my IP interest expense ? this will achieve my set objective of increasing tax deductibility this year and then allow me to manage next year accordingly.

BUT I prepay interest, assume:

$500k loan to fix, and prepay interest @ 5% (as an example)
= $25k interest bill.

That?s $25k of my own cash that I would have to use (I acknowledge that I would be doing this anyway next year over the course of the year).

So what I am thinking of doing to minimise use of my own cash:

(B) Set up a LOC to pay for the interest in advance. I am still thinking this through but I can set up a LOC secured against my IP and use this as a way to pay for my interest expense rather than dipping into my cash.

Does this sound about right?

 

[Terry_w]

Depends what you mean by 'right'.

That is one way to do it. But you are borrowing to pay interest so seek tax advice.

 

[Rixter]

What tax brackets will you be in for this and next year? Higher bracket this year than next year?

Note: tax bracket as opposed to gross income.

 

[Paul@PFI]

I would like to get some thoughts and views about whether I am overcomplicating things here.

My objective is as follows:
a) Increase my tax deductibility in FY15 (i.e. this year).
b) Retain the greatest amount of my own cash as possible.

My motivation is as follows:
a) I?m going to have a high tax bill this year and will likely have a lower bill next year (will have more deductable next year and will be negatively geared).
b) I want to work on keeping my cash liquid and for when/if I ultimately decide to put it towards a PPOR (via offset) to minimise non deductable debt. My strategy is to buy/hold so I want to avoid selling down the line to free up funds to offset non deductable debt.

So what I am thinking of doing:

(A) To maximise deductable debt this year:
Prepay interest this financial year for a component of my IP interest expense ? this will achieve my set objective of increasing tax deductibility this year and then allow me to manage next year accordingly.

BUT I prepay interest, assume:

$500k loan to fix, and prepay interest @ 5% (as an example)
= $25k interest bill.

That?s $25k of my own cash that I would have to use (I acknowledge that I would be doing this anyway next year over the course of the year).

So what I am thinking of doing to minimise use of my own cash:

(B) Set up a LOC to pay for the interest in advance. I am still thinking this through but I can set up a LOC secured against my IP and use this as a way to pay for my interest expense rather than dipping into my cash.

Does this sound about right?

One thing to watch...Make sure something untowards doesn't happen...Like a forced sale of shares or property next year. (eg Employee shares sold due to redundancy etc). Pregnancy, etc... Carefully estimate both years income and then find the sweet spot. You may find a prepay of 8months works better for example.

And beware of the forthcoming Budget !!! It has this way of stuffing plans like that. You would best wait until budget night.