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).
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"You’d be stupid not to try to cut your tax bill and those that don’t are stupid in business"
- Bono: U2