At Hewison Private Wealth, we refer to debt as “Good Debt” and “Bad Debt.”   

“Bad Debt” 

Bad debt is any borrowing you have that you cannot claim a tax deduction for. If you have taken on debt to fund an asset that does not produce income for you, then you cannot claim a tax deduction. Prime examples here include the property  you live in, a car loan, or credit card debt. 

“Good Debt” 

Good debt refers to any borrowing incurred to purchase income-producing assets. In this instance, you are able to claim a tax deduction for the interest on the borrowing. An investment property loan is tax deductible, as is a loan obtained to purchase shares. 

As most of us would know, life can get very busy at times and often it’s hard for the average person to keep track of their debt position. For example, a couple may be prudently repaying their home loan, even making extra repayments to save on interest. The result here is that they are building up “equity” in their home. This means  they effectively own more of their property than the bank does. 

They may also be accruing assets personally, such as a share portfolio with no debt attached to it. 

In this instance, let’s  consider the below scenario.  

The couple sells their shares ($100,000), using the proceeds to further reduce their home loan (“bad debt”). They then re-borrow the money and re-purchase a similar share portfolio. Their net position is basically the same; however, as they re-borrowed $100,000 for investment purposes, they have now replaced $100,000 worth of “bad debt” with “good debt.” They can now claim a tax deduction for the interest on this loan. 

Often, and understandably, people are too busy managing other areas of their lives to be aware of these strategies. This is just one way the advisers at Hewison Private Wealth actively manage their clients’ financial affairs. 

If you think you may be able to replace “bad debt” with “good debt,” we would welcome a chat with you to discuss this further.