Help to avoid co-mingling of funds

Discussion in 'Investment Strategy' started by Btaylor, 28th Jan, 2019.

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  1. Btaylor

    Btaylor Well-Known Member

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    Hi, I am after some clarification about what I need to do to ensure that my investment debt interest is deductible. Here is the hypothetical:

    - Investment loan of $200k with a lender (not CBA)
    - I have a CBA direct investment account (CDIA) with a $0 balance
    - My share portfolio is managed through CommSec.

    If I transfer money from the loan account directly into the CDIA and then buy shares through CommSec, will the interest definitely be deductible? I will make sure any left over funds are transferred back into the loan account after the share purchase is settled.

    Would it be better if I could settle the share purchase directly from the loan account (don't even know if it's possible).

    Also, should I have dividends paid directly into the CDIA also? Or direct them elsewhere?

    Thanks in advance,

    Bryce.
     
  2. Terry_w

    Terry_w Mortgage broker licenced 4 tax/legal advice Business Member

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    Make sure the CDIA account has no cash or maybe just a dollar. You want to leave evidence of the borrowed funds being used to buy the shares.

    Dividends can be paid anywhere.
     
  3. Harry30

    Harry30 Well-Known Member

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    Assume you borrow $10,000, and transfer straight into the CDIA account (with previously zero balance) to purchase shares. You then put the share purchase order in, spending (for example) a total of $9,900. This is not unusual as prices paid for ‘at market’ trades are only known once the trade is executed. So, if you did nothing more, the $9,900 would be tax deductible, but what about the $100 left over in the CDIA. If the CDIA is interest bearing (and you left the money there), the full $10,000 borrowed would arguably be 100% tax deducitble, as it is all used to produce assessable income (ie. $9,900 for shares and $100 in an interest bearing account). But what if you earn 0% on the CDIA (it is a non interest bearing transaction account), then the full $10,000 would not be tax deductible as I see it, as it was not wholly borrowed with the purpose of earning assessable income (interest on $9,900 is tax deductible but not the remaining $100).

    So, if the CDIA account is not interest bearing, then you have a problem as far as I can tell. Let’s say you try to fix all this by using the $100 remaining in the CDIA to pay down the $10,000 loan (‘transfer the money back’). Arguably, this does not fix things, in that the $100 repayment would be allocated proportionately to the $9900 of deductible debt and the $100 of non deductible debt. The loan is mixed purpose and remains so.
     
    Last edited: 28th Jan, 2019
  4. Btaylor

    Btaylor Well-Known Member

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    Thank you both for your responses. I think the best way to approach it is to purchase shares first without having any money in the CDIA. Then, once the trade is completed, transfer the EXACT amount needed to settle the trade from the loan account. Because trades are settled on T+2, I will have ample time to transfer the funds before settlement is due.

    I believe you are correct Harry that the 0% interest on the CDIA could cause issues if there is money left over. (I believe the CDIA only pays interest on balances over $10,000.
     
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  5. Harry30

    Harry30 Well-Known Member

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    Good point. Given trades are T+ 2, transferring the exact amount would avoid the co-mingling problem.
     
  6. Terry_w

    Terry_w Mortgage broker licenced 4 tax/legal advice Business Member

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    I think you could just place the unused funds back into the loan account without happing too many issues.
     
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