Tax Tip 59: Borrowing to Buy shares

Discussion in 'Accounting & Tax' started by Terry_w, 18th Oct, 2015.

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  1. Terry_w

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

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  2. chylld

    chylld Well-Known Member

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    So as long as the dividends are larger than zero, all interest on those borrowings is deductible?

    Do managed funds work the same way with distributions?

    If so, does this mean that a choice to reinvest fund distributions into additional fund units causes interest to only be deductible against the capital gain?

    Lastly, if interest is only deductible against the capital gain, does this mean you won't get a deduction in a financial year where you don't sell the asset and realise a capital gain?
     
  3. Terry_w

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

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    As long as there is a realistic expectation of dividends.

    Yes

    No

    Yes
     
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  4. Paul@PAS

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

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    And of course this view only applies to taxpayers who have shares on capital account. Those who engage in significant trading may have shares on revenue account and it could constitute business income. The interest may be deductible as incurred BUT non-commercial loss issues may also impact offset v's other income.
     
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  5. jay.

    jay. Active Member

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    Hi @Terry_w, can you give us some examples of this in action?
     
  6. Terry_w

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

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    of borrowing to buy shares?

    X borrows $100,000 to buy 500 XXX shares. XXX usually have paid dividends in the past and X wants to hold them long term to generate income.

    The security could be the shares or it could be property owned by X
     
  7. jay.

    jay. Active Member

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    Here's a potential scenario I may run into:

    I redraw $50k from split A of a 5-split PI loan to buy shares. Half pay dividends and the other half don't and I'm only in it for the capital gain.

    Is the interest on split A deductible?
     
  8. Terry_w

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

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    It might be partially deductible.
     
  9. jay.

    jay. Active Member

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    One further complication - the shares are bought through a discretionary trust. Do you see any potential issues there?

    Do you have any recommendations in the ACT where I can get advice?
     
  10. Terry_w

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

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    It depends

    No
     
  11. jay.

    jay. Active Member

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    What does it depend on? The dividends will be distributed partly to charities and the rest to the non-deductible splits.
     
  12. Terry_w

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

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    Sounds like you need to get some specific tax advice.
     
  13. Paul@PAS

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

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    The trustee would need to have borrowed the funds and incurred interest. The net income (ie dividend - interest) would be net income of the trust and distributed to beneficiaries. If its negative the beneficiaries get nothing and the trustee may have to consider the use of the franking credits. Perhaps they are refundable ?

    There may also be issue of streaming income to specific beneficiaries to consider. The deed would need review.

    A beneficiary must consider if they are able to claim the franking credits they are proportionately entitled to. Matters such as 45 rule etc may taint this

    Best advice is any tax agent
     
  14. jay.

    jay. Active Member

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    Here's a simpler question:

    I redraw to buy small cap shares that pay no dividends. In year 2 I sell them for capital gain. Can I claim interest incurred in year 1?
     
  15. Terry_w

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

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    It could be taken into account when working out CGT.
     
  16. Casteller

    Casteller Well-Known Member

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    A problem in Australia is the ripoff share margin loan rates, which are actually higher than residential property rates, which doesn't make sense, given the much lower LVRs and higher liquidity. Try to find an international broker if possible which is more reasonable.
     
  17. jay.

    jay. Active Member

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    My understanding is that shares are more volatile—less houses get razed than publicly listed companies go bankrupt.
     
  18. gman65

    gman65 Well-Known Member

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    @Terry_w if you redraw against a PPOR, and then use that amount to purchase shares through margin lending, is both the interest on the redrawn amount, as well as margin loan interest deductible?
     
    Last edited: 19th Nov, 2016
  19. Terry_w

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

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    Yes both interest on the LOC and the Margin loan could be deductible - if you structure it right.
     
  20. Paul@PAS

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

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    I'm a bit confused. Margin lending is a way of using equity in the shares to borrow a proportion of the share value meaning you can leverage a high value portfolio subject to value being stable.

    The use of equity from other sources (LOC ?) is usually on a different portfolio which cannot be geared...It is already I guess. You cant usually blend equity LOC interest and ML interest.

    If you could then a leverage risk exists and its important to understand that risk.
     
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