Loan for investment question

Discussion in 'Accounting & Tax' started by Redom, 1st Mar, 2019.

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  1. Redom

    Redom Mortgage Broker Business Plus Member

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    Hi experts!

    I think I know the answer to this, but seeking some clarification from those with more know how than me!

    Scenario:
    • Bob seeks a loan for investing in shares (but not secured by those shares).
    • He gets it & then buys those shares.
    • 6 months later, Bob decides to liquidate those shares & uses the proceeds from sale for personal use.

    Context:

    • Bob has a portfolio of assets that includes shares/property/etc.

    Question:

    • Can Bob continue to claim the interest expense on the original loan to buy shares? Note, these particular shares are no longer owned and there's no income being derived from them specifically. Investment income being derived though.
     
    Redom, 1st Mar, 2019
    #1
  2. ChrisP73

    ChrisP73 Well-Known Member

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    Yes, but he might go to jail if the ato find out .

    Seriously: No.
     
    ChrisP73, 1st Mar, 2019
    #2
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  3. Scott No Mates

    Scott No Mates Well-Known Member

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    The purpose of the loan has changed from investment to personal. When the funds cease to be used for investment, then the interest can no longer be claimed. (I have NFI - not financial advice)
     
    Scott No Mates, 1st Mar, 2019
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  4. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    No.

    But if the shares were sold at an amount less than the loan used to acquire them then the interest on this shortfall could potentially be claimed.
     
    Terry_w, 1st Mar, 2019
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  5. Redom

    Redom Mortgage Broker Business Plus Member

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    Cool - was pretty sure, but thanks for the clarification!
     
    Redom, 2nd Mar, 2019
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  6. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    When money is borrowed for a specific purpose then the loan interest ceases to be deductible if the relevant asset is sold and the loan is not repaid.

    There is an exception to this rule that ends the deductible interest. That is if the total proceeds from the sale of the relevant asset is not sufficient to discharge the debt. Then the interest may continue to be deductible.

    Its also worthwhile remembering that deductible loan interest will depend on if shares / securities produce income. Shares / securities acquired for resale at a profit that dont pay any income wont meet this test. The interest may be a factor in a CGT calc.

    And any non-deductible interest may be a 3rd element CGT cost.
     
    Paul@PAS, 4th Mar, 2019
    #6