Tax Tip 398: Claiming Interest Against CGT When Borrowing to Buy Shares with No-Dividends

To be able to claim interest against income, there needs to be an expectation of income. Some shares do not pay dividends and there is no expectation that they will. In this case the interest on a loan used to buy those shares will not be deductible.

But you should still keep track because the interest on the loan can be used to reduce CGT down the track as it would be a third element cost base expense which increases the cost base.


Example

Homer borrows $100,000 to buy a bunch of shares on the ASX. None of the shares pay dividends so the 4% interest on the loan each year is $4,000 and Homer doesn’t claim it.

After 10 years he sells those shares for $200,000 and thinks he has to pay CGT on $100,000 x 50% CGT discount which would mean $50,000 is added to his taxable income.

But then he hears that the interest is a cost base expense and as it amounts to $40,000 it is considerable.

The CG of $100,000 is reduced to $60,0000 ($100,000 capital gain less $40,000 in interest that he had not claimed). This is then reduced by 50% to $30,000 (held longer than 12 months). The $30,000 is added to his taxable income.

Homer might save nearly $10,000 in tax by finding out that interest is a cost base expense.


Note that where you have the choice claiming interest is usually better (but not always) against income rather than capital gains as

a) It is not reduced by the 50% CGT discount, and

b) It has better to get the benefit sooner rather than later.

But see

Tax Tip 204: Better to claim an expense off income rather than CGT? Tax Tip 204: Better to claim an expense off income rather than CGT?

 

A common issue. Can get very messy with blended loan issues when a portfolio includes changes to investmnets and some income investments