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Interest deductions on shares not 'at risk'

Discussion in 'Accounting, Tax & Legal' started by Rod_WA, 19th Jul, 2007.

  1. Rod_WA

    Rod_WA Well-Known Member

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    I am currently preparing to take put options over the ASX to protect my share portfolio.

    Does anyone know if this affects the deductibility of interest on the shares, since the portfolio would be no longer 'at risk'?

    (eg there is a 30% risk requirement for the holding rule for franking credits, but I can't find anything on the ATO website that refers to interest).

    Thanks
     
  2. Simon

    Simon Well-Known Member

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    Pretty sure that all interest borrowed for income producing investments is deductible. Not sure that risk enters the equation.

    Cheers,
     
  3. Rob G.

    Rob G. Well-Known Member

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    Good idea,

    Considering this for my SMSF at least.

    I have to be careful as I don't know your specific position - e.g trader v investor & the details of the option contract.

    However, generally the borrowing to acquire the shares is fully deductible to the extent they are for deriving your assessable income.

    The option is a capital asset as it is to protect your investments (as an investor). This is not deductible but forms part of the CGT process - treatment differs whether it expires or is exercised. Capital loss if lapses or is ignored and cost included in the cost/proceeds when shared are sold under the option.

    Your entitlement to franking credits will likely remain but the holding period 'at risk' might be lengthened. This is a complicated formula depending on the contract details. However, if you are a buy-and-hold type then this is unlikely to affect you.

    On the whole the put option gives you a bet each way when the market is near peak and still defers CGT - unlike progressively selling down, incurring CGT AND missing out on any rising market movements.

    Its worth getting some specific advice for you.

    Cheers,

    Rob
     
  4. MattR

    MattR Well-Known Member

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    I agree with RobG. The put option will not be deductible it is capital, however the interest borrowings to purchase the shares will be deductible.
     
  5. Rod_WA

    Rod_WA Well-Known Member

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    Thanks to you all.
    That's pretty much what I made of it, and I'm glad to hear you agree.

    I am very much a 'buy and holder' and the 45 day rule is not an issue since I've had most of the shares >>> 45 days.

    How do I apportion the costs, ie I hold many different stocks, and if I get put options over the AllOrds, do I apportion by my exposure in absolute terms?

    eg I hold BHP 12%, WES 10%, ... , GRR 1% (very different to the AllOrds) so do I apportion the costs according to these percentages?

    Or, I guess it doesn't matter if I don't ever sell the shares!!
     
  6. DaveA

    DaveA Well-Known Member

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    also you have to earn 5k franking credits for the 45 day rule to count anyway, if its in a trust its 5k per person distributed (so a husband and wife can have 10k)
     
  7. Rob G.

    Rob G. Well-Known Member

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    That's a tricky question.

    Generally ....... and I could be wildly wrong for your circumstances ...

    Where the option is exercised, you need to apportion its cost on a 'reasonable basis' across those shares sold under the option.

    What 'reasonable' means is open to debate. If you are only selling the dogs then you would apportion costs based on value at the time you take out the contract as they would be proportionately higher weighting.

    If the whole protfolio is sold I don't think the ATO would care (subject to all being held more than 12 months).

    If a partial exercise, it is in your best interest to allocate as much reasonable cost as possible to those shares sold.

    If the option expires (unexercised, then this is the CGT event to claim your costs against.

    All this depends very much on your individual & contract details.

    Sorry I don't wish to hazard a guess for you, it really is an area to get advice on.

    I don't think it would be any easier to calculate if you sought a limited recourse arrangement with your lender !!

    Many people may be relying on their stop-loss orders instead. These have been shown to fail miserably as trading gets jammed with panic sellers - as we have seen !

    Cheers,

    Rob
     
  8. seaview

    seaview Well-Known Member

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    Hi everyone,
    I am about to receive more than 5k franking credits - just for some managed funds I have held for a while, and wondered how this 45 day/over 5k rule works. What do you mean by 30% risk? Can anyone please explain this rule in laymans terms.
    Many thanks
    Seaview
     
  9. Rob G.

    Rob G. Well-Known Member

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    Hi Seaview,

    If you are receiving franking credits from a trust then they will have complied with the requirements.

    The 45 day rule is designed to prevent trafficking in franking credits for a tax advantage.

    Very simply, you need to have held the shares for more than 45 days in total without any strings attached to be eligible. This 45 day period can include the dividend date.

    If you have hedges or other related conditions that limit your exposure to risk as the 'owner' then this holding period is extended.

    Not a problem for simple investors.

    Cheers,

    Rob
     
  10. Rob G.

    Rob G. Well-Known Member

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    That doesn't read very well does it ?

    Try this:

    Purchase at least 46 days before ex-dividend date then you can sell the day AFTER the ex-dividend date (2 days after the register is consulted).

    Purchase the day before ex-dividend (last day on the register) then you can sell 46 days after the ex-dividend date.

    This is for a simple shareholder (unhedged, no contracts or related conditions) and ordinary shares.

    How does this sound to any Tax Agents ? The ITAA is clumsily worded.

    Cheers,

    Rob