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Capitalisation of Margin Loan

Discussion in 'Accounting, Tax & Legal' started by DaveA, 27th Mar, 2007.

  1. DaveA

    DaveA Well-Known Member

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    I know there has been heaps spoken about this before but im still a tad confused.

    Is margin lending interet that has been capitalised tax deductable?

    If so, why?

    How is this any different than capatlising interest on say an IP (if you have a LOC or enough equity).

    Thinking about fixing my margin loan interest rate, however just wondering if its best to capatlise it or just pay it off from my bank account.

    A clear explaination which clears it up will be great.

    Cheers
     
  2. julia

    julia Active Member

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    Capitalised interest is deductible if it is not part of a scheme to reduce tax. Sound like a catch 22, probably is. Have a look at the claimable loans booklet under free publications on bantacs.com.au for ideas on how not to be a scheme to avoid tax.

    Julia
     
  3. DaveA

    DaveA Well-Known Member

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    thanks julia

    current margin loan is made up of
    27,000 funds
    2,300 personal drawings (yes i know a mistake)
    1,417 capitilsed interest

    im just wondering if its worth capatilising the interest (say $1000) by prepaying it instead of having it direct debited out of my bank account

    and then banking that $1000 into the share fund which would pay down both the deductible and non deductible part, having a higher % of the deductible amount after the transaction??

    Bit tricky i know.... i wish i never redrew those funds...
     
  4. julia

    julia Active Member

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    Davea,

    Can't see how this would change the ratio of deductible to non deductible borrowings. To keep it simple lets say you borrowed 18,000 for deductible and 2,000 for private ie 10% non deductible, the interest is 1,000 which you capitalise so now 18,900 deductible 2,100 non deductible when you pay $1,000 off the loan it goes back to 18000 and 2,000 though if you then drew on it to buy more shares whorth $1,000 the ratio would change to 19,000 to 2,000 but it doesn't help you remove the non deductible.

    Julia
     
  5. DaveA

    DaveA Well-Known Member

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    hmmm yes i see what you mean, dont no what i was thinking about (maybe not taking into account for the interest)....

    there is no way to 'clean' the account wiht out selling all assets, paying down the remaining debt and re buying everything is there?? CGT and time lag make this not the best option but i think its the only. Ill just keep the dirty if thats the case..
     
  6. julia

    julia Active Member

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    DaveA,

    There is one way if you can organise another loan from somewhere. Refinance the whole amount into a loan that has two splits under it. One will be the non deductible the other the deductible. You then have two separate loans and you can pay out the non deductible.

    Julia
    bantacs.com.au
     
  7. GavinC

    GavinC Active Member

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    Julia

    I'm not sure you realised but you've just recommended Dave setup a scheme to avoid tax! This is not really materially different from the circumstances in Hart's case. The only thing is the onus is on the tax office to apply the anti-avoidance provisions, so Dave could probably get away with it (and the sums involved are obviously small).

    Dave the in reply to your original question, the current view of the courts is that capitalised interest is deductible. This was most recently examined in R & D Holdings v DCT. Note though the ATO have never been happy with people claiming deductions for capitalised interest, and they reserve the right to disallow the claim where they believe interest is being capitalised indefinitely. Their view is that if the interest is always rising such that you never get into a positive income position, then the purpose of your borrowing is to eventually realise a capital gain, and not earn income, and thus the interest would not be deductible. Also as far as I know the High Court has never considered the question. So bear this in mind.

    As for cleaning up your current loan, my advice would be to leave it as it is and open a new margin loan. If you currently use your own money to contribute to your share portfolio in conjunction with the margin loan, instead use that cash to pay off the old loan, while buying shares exclusively with borrowed funds under the new loan. You can then progressively move your shareholdings accross as security for the new loan without triggering a CGT liability (be careful not to trigger an inadvertant margin call though).

    And remember not to use your investment loan for private use in future!
     
  8. julia

    julia Active Member

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    Gavin,

    Paying the most amount of tax possible is not compulsary. We are still entitled to choose as long as it is not a contrived scheme. Simply splitting the loans into deductible and non deductible is a practical choice for record keeping purposes alone. Choosing to pay one off sooner than the other is a choice we are entitled to. As the judge said in Harts case of course a person will make a choice considering the tax consequences but is it a scheme with the dominant purpose for a tax benefit (required for PART IVA to apply)? No TR 2000/2 discusses these sorts of loans and sorting them out. Hart's loan was advertised by the bank for the tax benefit and it was artifical in nature.

    Julia
    Ban Tacs Accountants - Rental Properties, Tax, Capital Gains, Fringe Benefit
     
  9. GavinC

    GavinC Active Member

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    Julia

    My bad, you are quite right, TR 2000/2 does indeed allow you to refinance in this manner. Thanks for the correction.

    Cheers
    Gavin