Tax Tip 59: Borrowing to Buy shares

Thanks for your reply.

 

Note that where the shares are paying out in special bonus shares rather than dividends the interest will not be deductible where the bonus shares are not assessable as dividends. Some are not taxed until they are sold.

 

If the interest you pay on the loan to purchase shares is higher than the total dividend income, can the remaining interest be offset against future capital gains?

I.e. Interest on loan, 10k p/a. Dividend income, 8k p/a. 2k remaining interest against the cost base of the shares?

 

It would be offset against income

 

Sorry to for the basic newbie questions! I take it you mean other income earned from work, similar to negative gearing for property? But if there is no other income, just the share dividends?

 

Yes it is negative gearing.

If no other income it would be a income loss, a negative income, whic is carried forward to the next financial year, but see this:

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?

 

Fantastic, thanks mate!

 

Terry,

in these turbulent times many companies are looking at suspending dividends for the near future, how does that impact the tax deduction on borrowing to invest in income producing assets?

Is there a difference between shares currently held in companies that suspend dividends and future purchases of shares of a company that has suspended dividends?

Would this be dealt under ruling 9, that if the purchaser had a reasonable expectation that dividends would be paid in the short or long term?

"9. As a general rule, interest on money borrowed to acquire shares will be deductible under the first limb of subsection 51(1) where it is expected that dividends or other assessable income will be derived from the investment. Such an expectation will usually exist as shares by their very nature are inherently capable of generating dividends, whether in the short or long term. However, such an expectation must be reasonable and not a mere theoretical possibility; there must be a prospect of dividends or other assessable income being received."

Thanks for your time.

 

To claim the interest you need an expectation of dividends - that doesn't necessarily mean they have to be declared each quarter.

 

Assume it applies if dividend is declared but subsequently cancelled as the expectation is there. Odd quirks.

 

eg RDP was paying income and has suspended. VAS is still paying. It could stop but thats not a concern.

 

Something I don't quite understand is using this strategy for ETF style products that distribute both income and CGT with each payment. Does this mean that only part of the loan interest would deductible annually and another part would need to be apportioned to the CGT distribution


This would seem incredibly complicated and it might be best to invest only in shares and not ETFs using borrowed funds.

 

No

 

Thanks Terry, appreciate your help and sharing your wisdom.

To confirm I'm taking your no to mean that the whole interest component is actually deductible against income each year regardless of the investment being an ETF (with CGT dist) or Shares?

 

that is something you should seek your own tax advice on.It will vary depending on the circumstances.

 

It can be useful to read the ETF's Product Disclosure Statement as well.

 

Are the dividends required to be paid back onto the investment loan or can they be used to pay down PPOR non deductible debt?

Also what happens if you sell some shares? are you required to repay this amount on to the investment loan? For example you buy $100,000 of X shares. The shares then increase to $110,000 and you sell down $10,000 worth, what are you allowed to do with this $10,000?

 

There are no requirements like that, just consequences.

If you don't pay the interest on the loan you will be capitalising interest, but the dividends can go anywhere you won't.

If you sell shares you can no longer claim the interest on any loan that was used to purchase them (except in a limited situation where you sell at a loss.

You could do what you want with the $10k, but only about 91% of the interest would be deductible going forward if you didn't pay 10% of the loan back - rough %

 

ETFs are a listed traded security. No such thing as a PDS.

The simple way to determine IF interest can be deductible to google "XXX Distribution History / Dividend History" where XXX is the ASX code. Those that pay pay regular income. Those that never pay never pay. Suspended dividend schemes MAY usually be OK. But f a entity had announced a change of events means it will be unable to continue to pay that would pose a issue.

Many ETFs pay monthly, qtly, semi or annual income. Some pay none at all. Especially those link to US markets. US companies rarely pay dividends.

 

I believe that statement to be incorrect.