Interest deductibility for bonus share plans

Discussion in 'Accounting, Tax & Legal' started by Coolcup, 9th Jul, 2018.

Join Australia's most dynamic and respected property investment community
  1. Coolcup

    Coolcup Member

    Joined:
    27th Jun, 2015
    Posts:
    16
    Location:
    Sydney
    Hi everyone

    I have a quick question. I understand that if I use a loan to fund a share investment that is expected to produce dividend income, the interest on the loan is likely to be deductible.

    If I borrowed money to invest in AFIC and then chose to reinvest their dividends by way of their Dividend Substitution Plan so that the dividends were not assessable income for tax (it is instead like a bonus issue of shares), would the interest on the loan be deductible? Obviously in this case, AFIC could produce an assessable income and I could choose to turn the Dividend Substitution Plan off - so wondering if the Dividend Substitution Plan complicates here from a deductibility perspective.
     
    4 people like this.
  2. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Plus Member

    Joined:
    9th Jun, 2006
    Posts:
    27,109
    Location:
    Australia wide
    Interesting question. If there is no expectation of income from dividends then the interest could not be deductible under s8-1.
     
    4 people like this.
  3. Coolcup

    Coolcup Member

    Joined:
    27th Jun, 2015
    Posts:
    16
    Location:
    Sydney
    Thanks Terryw. If the strategy was to do the bonus plan for a few years and then to turn it off and earn an income from the shares - would this establish an expectation of income from dividends or is it a year by year thing?
     
    2 people like this.
  4. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Plus Member

    Joined:
    9th Jun, 2006
    Posts:
    27,109
    Location:
    Australia wide
    There doesn't necessarily need to be an expectation of a dividend immediately, but you will need to speak to a tax adviser to do some research into the ATO's opinion on this matter. Perhaps a private ruling.
     
    2 people like this.
  5. PeterT

    PeterT Active Member

    Joined:
    9th Sep, 2016
    Posts:
    26
    Location:
    Sydney
    Great question @coolcup. I have often been tempted to think more deeply about these Bonus Share Plans (BSPs), without having had the avenue to explore. And as @Terryw suggests, it would be interesting to know the ATO's opinion.

    The BSPs offered by some of the LICs seems to me to have the sole purpose (which is certainly not without merit) of avoiding the taxable income associated with dividends by converting that income into a capital gain. If that is the sole purpose, then my guess is that the ATO would disallow the deductibility of the interest on any debt used to purchase the shares. So my question comes down to: is that really the sole purpose of BSPs? Or can anyone think of another?
     
    2 people like this.
  6. Hosko

    Hosko Well-Known Member

    Joined:
    21st Jun, 2015
    Posts:
    272
    Location:
    Victoria
    Do you still own the original AFIC purchase? If so, wouldn't the loan remain against this?
    And as a layman, I would have thought that this scenario would be perceived as income by the ATO but could be completely wrong as the experts have mentioned other outcomes.
     
    2 people like this.
  7. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Plus Member

    Joined:
    9th Jun, 2006
    Posts:
    27,109
    Location:
    Australia wide
    Good point, but interest is only deductible where a loan is used shares that produce assessable income. The issue with this is there is no assessable income.
     
    2 people like this.
  8. paddy55

    paddy55 Member

    Joined:
    18th Jun, 2007
    Posts:
    7
    Location:
    Darwin
    If you own a capital asset which produces no income, a) the interest is not deductible immediately and b) the interest is accumulated and is deductible from the capital gain on the sale of the investment.
     
    2 people like this.