Tax Tip 272: Borrowing to buy shares and then selling those shares and deductibility of interest

Discussion in 'Accounting & Tax' started by Terry_w, 13th Feb, 2020.

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  1. Terry_w

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

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    One common misconception that I see goes something like this:


    • Borrow from a LOC to buy say $100,000 worth of shares that produce income. Claim the interest on the loan against those shares. So far so good.

    • Then, at a later date, sell those shares. Use the money from the sale to pay down the non-deductible PPOR debt.

    • Keep claiming the interest on the $100,000 LOC – its ‘purpose’ after all was investment.


    Of course, this won’t work. Those asking really know this deep inside, but they are hopeful that they have discovered a secret debt recycling strategy.


    Once the shares are sold there is no longer any connection between the incurring of interest and any income so the interest cannot be deductible. It is not really the purpose of the loan that counts, it is the use to which the borrowed funds are put. So there is generally no point in keeping the loan open. The LOC can be paid back – but it can be reused at a later date to invest further.


    However, if the shares are sold at a loss it might be possible to keep claiming the interest on the loans used to buy those shares in limited circumstances. See Tax Tip 212: Claiming Interest after Sale of Asset at a Loss Tax Tip 211: Claiming Interest after Sale of Asset at a Loss
     
  2. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

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    Yep - Selling the asset that was originally acquired using the borrowed funds means that the deductible nexus ends on that day even if the loan ifs not repaid. The use of the proceeds needs to be considered. If it was used to buy a new IP then the interest may commence being deductible against the new IP, not the one it secured against.

    Using the proceeds can be tainted or even blended in many ways:
    - Partly used for a new investment purpose and also private use (eg a boat)
    - Used to fund a development that is planned to be built & sold not rented.
    and so on..... We have all hard of belnded loan problem. This is a blended asset problem. It affects the loan interest and its deductibility.

    I'm often asked for clarification on what happens if you trade the shares regularly. The original borrowing was for CBA and NAB shares but is now ANZ and BHP shares...Thats fine. The asset has been changed rather than "refinanced". But concerns can occur if you switch investments for non-income producing purposes. Eg you sell the CBA shares and NAB and buy ANZ and Facebook Inc. Facebook shares dont pay dividends so you now have a blended loan concern. The test is income - Not intending to make a profit.
     
  3. Terry_w

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

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    Thats an interesting one.

    Bart borrows $100,000 to buy ANZ shares. He does this by transferring $100k from his AMP loan direct to his empty comsec account

    so far so good

    Bart sells the ANZ shares for $150,000. This is deposited into his Commsec account.
    He then buys $100,000 worth of WBC shares.
    The $50,000 left over is transferred to another account.

    Can Bart claim 100% of the interest on the WBC shares?
    I don't know because Bart has muddied the waters a bit here.

    It would been preferrable to empty the comsec account and repay the AMP loan and then redraw $100,000 and transfer over again.

    But not doing the the ATO could argue that the loan wasn't used to buy the WBC shares. At best 100,000 / 150,000 of the interest could be deductible.

    I haven't seen anything to indicate how the ATO might treat this, have you Paul?

    Any client of my loan company - I will offer a free private ruling, thru my law firm, to find out.
     
  4. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

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    Commsec operate a trading sweep if you use the ACA (Accelerator Cash Account) and the trading or accelerator cash accounts are fine according to a ATO view I obtained. It is a private ruling however. I asked if they would give me a class ruling and they declined by ignoring me. I cant apply for a product ruling - Only Commsec. BUT if the funds go elsewhere yes it could create a concern.

    Non CBA people eg STG who have the cash proceeds credit their savings may have a issue. The subsequent new purchase would draw on the STG account and its basically not using borrowed money.

    I always advocate teh CBA ACA account v's another bank. SMSFs are OK to use another bank account as they dont borrow.

    There is another safe way. Use a margin lending facility without borrowing against the shares. The tie the cash and trading together.

    Tip - NEVER have income credited to the cash trading account !! It can blend too.
     
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  5. Terry_w

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

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    And if the loan used to buy the shares was PI and has reduced in balance since taking it out initially you would only have to stop claiming the interest on the loan associated with those shares. This would mean you would only have to pay back the remaining balance not the original borrowed amount.

    Example
    Borrowed to buy $20,000 worth of AMP shares and $20,000 worth of WBC shares with one loan. If the loan is PI and only $20,000 is left in total after say 10 years, if you sell the WBC shares you would only need to repay $10,000 into the loan as this is the amount that relates to those shares. This would be the case if you sold them for $20,000 or $40,000 or more
     
  6. mark davies

    mark davies New Member

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    can somebody clarify this

    if i have 20000 shares in company x purchased 5 years ago
    and i have borrowed money to buy 20000 more shares in company x this year
    can i sell 20000 shares in company x and still claim the interest for the other parcel or will the tax office choose to believe that i have paid off the loan

    Cheers
    mark davies
     
  7. Terry_w

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

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    It will depend on which parcel you sell

    Tax Tip 148: CGT and Different Parcels of the Same Shares Tax Tip 148: CGT and Different Parcels of the Same Shares
     
  8. markdav

    markdav New Member

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    thanks terry

    just to be clear i can nominate the parcel that has been sold

    thanks again

    i appreciate your help and quick response

    mark davies