Change Bad Debt into Good Debt
This strategy is all about changing bad debt into good debt. Bad debt is defined as debts which don't help you build wealth and where the interest expense is non-deductible. This includes personal credit card debts, personal loans, HECS debts, primary residence home loans, etc. In contrast, good debt is debt which works to help you build wealth and where the interest expense is tax deductible. This includes debts used to finance investments in shares, rental properties, and businesses.
Implementation process:
- Firstly, use all available cash flow to pay down bad debt as quick as possible.
- Until bad debt is eliminated good debt should be structured as interest only payments, or ideally capitalised completely (i.e. no repayments at all).
- Utilise business goodwill to pay out your private mortgage.
- When purchasing investments with good debt they should ideally be financed with 100% debt.
- Redraw facilities should not be used to pay private expenses or debts.
- Selling debt free investments to pay out bad debt. Beneficial ownership of the investments can be kept by selling them to a related party (spouse or entity).
Similar posts you may like
- South Korea’s robot tax
In 2017, South Korea enacted the world's first robot tax. The law doesn't require robots to be taxed. Instead, they have reduced the tax Read more
- 1974 – Suit Leasing Scheme
In 1974 the UK’s top marginal tax rate of 83% applied to incomes over £20,000 (equivalent to £200,000 in 2018). In addition, passive investment Read more
- Establish a Family SMSF
A self managed super fund (SMSF) is a superannuation trust structure that provides benefits to its members upon retirement. The main difference Read more
- 1709 – Candle Tax
A candle is an ignitable wick embedded in wax, fat, tallow or another flammable solid substance. They have been used throughout history for light, Read more
"You’d be stupid not to try to cut your tax bill and those that don’t are stupid in business"
- Bono: U2