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Income or Capital Deduction

Discussion in 'Accounting, Tax & Legal' started by willy1111, 14th May, 2007.

  1. willy1111

    willy1111 Well-Known Member

    Joined:
    5th Jul, 2006
    Posts:
    54
    Location:
    Melbourne
    Hi All,

    I am considering a structured product which is 100% financed, investing in the Japan index (Nikkei 225) and the investment matures in 7 years.

    The investment will not make any distributions during the Term (7yrs) - other than potentially a final distribution at Maturity, or if you redeem your Units prior to Maturity.

    Obviously you have to pay interest during the investment on the 100% finance over the 7 yrs.

    I am curious to know if people think the tax office would have any problems with me claiming interest on the finance each year against my wages income? - which is what I would want to do.

    Or. . . .

    If they think the interest should be added to the cost base at the time I cash out of the investment?



    The PDS says when talking about interest deductibility "it will be necessary for you to demonstrate that, at the time you aquire your Units, you had the clear intention of holding the Units to produce assessable income, notwithstanding that the income is not expected to be derived by the Trust and distributed to you until 2014. In particular, if you expect to redeem or dispose of your Units without deriving any assessable income through the Trust, your intention to hold the Units to produce assessable income might be open to question."

    Anyone care to share their thoughts??????
     
  2. GavinC

    GavinC Active Member

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    11th Apr, 2007
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    27
    Location:
    London
    i think it would depend on the nature of the distribution on maturity or redemption, the PDS should say this. If at the end it distributes income (and I think you would need a fair expectation that the income will exceed the interest you paid), and you intend to keep it until then you should be fine.

    Otherwise you will be clearly be investing for capital growth, and the deduction will be denied, and added to the cost base instead.
     
  3. willy1111

    willy1111 Well-Known Member

    Joined:
    5th Jul, 2006
    Posts:
    54
    Location:
    Melbourne
    Hi,

    I spoke with an accountant today from the advisers recommending the product and he said it would be distributed as income on maturity and that there would be no problem claiming interest in the 7 years prior to receiving any income distribution.

    He gave an example of some shares not paying dividends, yet a margin loan on those shares would still be deductable.

    There is a reasonable expectation it is going to distribute income in the future, thus the deduction for interest should be allowable.

    I certainly intend for the distribution to far outweigh the interest, by 2 to 3 fold.
     
  4. NickM

    NickM Co-founder Staff Member

    Joined:
    20th Jun, 2005
    Posts:
    321
    Location:
    Sydney
    I looked at a very similar product ( could be the same one)
    My first question was - where is the product ruling ?
    Not available - product has been out for 2 years now
    The only support is the PDS and that is not good enough for me.
    At best I think you are entitled to a deduction at 85% of the interest cost and that could change pending ATO review of capital protected products in the next few months.

    They are relying on current legislation and it refers to 5 year products not 7.

    re the accountant, see Fletchers case. if you purchased shares and they emphatically stated that they would not pay a dividend for 7 years i think you would struggle to convince the ATO you were in it for income. If he is sure ask him to put itin writing for you before you proceed.

    As an adviser there is no excuse for these guys not obtaining a product ruling, hence i will not place my clients at risk given the multitude of other alternatives out there with rulings.
    NickM
     
  5. willy1111

    willy1111 Well-Known Member

    Joined:
    5th Jul, 2006
    Posts:
    54
    Location:
    Melbourne
    Hi Nick,

    Have since spoken to the adviser again and he has said it all comes under Section 16E of the tax act, not sure if that means anything to you??

    He said he has spoken to many accountants and none have had a problem with it. He is comfortable investing in it as well. I have known him for over 2 years and he has done well by me, so there is a certain amount of trust/faith I have in him given our relationship.

    The fund invests in a SWAP agreement (which I am told is treated as income rather than capital), and you can withdraw from the fund every six months after the first year.