Shares & Funds LOC to buy shares without contamination

Discussion in 'Accounting & Tax' started by AlexIM, 15th Nov, 2021.

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  1. AlexIM

    AlexIM Active Member

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    Hi
    How to avoid contamination of an investment loan to buy shares if I need to transfer it into broker account?

    I have an LOC approved to buy shares for $100k in Bank A. I have a Brokerage/Trading account in Bank B which I want to use to buy the shares.

    The trading account may have some small amount of funds in it and also it may have very small amounts deposited into it as interest on any cash in that account.

    The above makes me concerned that if I move the $100k into that account, they would "mingle" with the $0.12cents I've got there. (And even if I remove these funds, bank may deposit interest into that account on any cash I would transfer so conceptually the same problem remains.)

    a. Does it matter for traceability and tax time if I have to transfer the $100k from Bank A in multiple batches of daily limit to Bank B across a span of time?

    b. how do I keep records that show that the shares bought correspond 1-1 to the $100k I transferred? For example, my thinking is that it would be best to avoid buying shares through same brokerage account with any other funds in the period I work with the loan.

    c. It is likely that some funds may remain when buying shares, let's say $7 remain, what do I do with this sum? Do I transfer it back into the loan and never touch them again until I close off the investment by selling the shares and repaying the loan?

    I am looking into what would be the cleanest/neatest solution that would be easiest to explain to accountant or ATO at tax time if I keep the appropriate records.

    Thank you very much
     
  2. Terry_w

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

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    generally not

    You just keep a record of the interest which you could easily work out if the whole loan is used to buy shares

    You would have to apportion the interest, or you could just move it back into the loan if a small amount - which would be mixing, but if such a small amount it won't matter

    get your own tax advice before trying the above.
     
  3. Paul@PAS

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

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    12c, or even $7 arent material as a % of $100,000. eg $7 is 0.0069995 %.....It rounds out as 0.00%.
    Provided all the trading account is only used to buy income producing shares and ETFs there should be no concern.

    However where savings AND borrowed funds are both used just ensure 100% of the investmnet funds are used to buy shares. Then 100% of the loan interest is deductible. However lets say you transfer $20K of savings and $100K of borrowed funds in May 2022 and then only invest $60K. Then 50% of the interest is deductible at June 2022. You cant attribute the $60K as fully using borrowed funds as all the funds are blended. Just 50% is then allowed. But if the shares were acquired BEFORE the $20K went to the trading account you could claim 6/10th of the interest.

    The ATO would look at the source of borrowing and where it is transferred to eg Commsec. Then what was acquired and so on. In a review they ask for copies of all these things.
     
  4. AlexIM

    AlexIM Active Member

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    Thank you! I think I understand better, so if my aim is to keep everything as "neat" as possible, I would empty out the brokerage account, transfer the $60k out of $100k, and use the full $60k to by shares "immediately".

    Then the bank's interest statement should be valid, as they would charge interest only on the $60k out of the $100k. (At least that's how my investment loan should work.)

    Then the remaining question is what is "immediately" from tax perspective. If I transfer $60k and buy the shares across a span of let's say 2 days, would that still be considered immediate? Or would I need to still do the full calculation and satisfy myself that the difference is less than $1 so can be ignored?
     
  5. Terry_w

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

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    Sooner the better
     
  6. Rowan

    Rowan Well-Known Member

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    Hi Paul, and just to reiterate what you are saying there is that its perfectly fine to mix 20k savings with 100k borrowed funds (so in total 120k in your balance) as long as you purchase >100k in securities as soon as possible, that way 100% of the 100k loan is deductible thereby avoiding the question of apportioning.

    Basically I'm clarifying that in above scenario, ATO won't read that only 100/120 (83%) of your interest on the 100k loan is deductible given the mix balance.
     
  7. Terry_w

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

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    If you borrow 100% to invest in income producing assets, without any detours or mixing, the interest would be deductible to you.
     
  8. AlexIM

    AlexIM Active Member

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    This doesn't look right, how can you sensibly prove that 100k out of 120k came only from the investment loan, rather than 100k = (20k savings + 80k investment)? Paul's reply mentioned that 20k in saving must arrive after the purchase.