Interest on borrowings to pay interest

Gday mate,

Say that I decided to purchase portfolio shares which historically give generous dividend income stream. So in order to purchase the shares, i plan to take a loan.

I was wondering what if i borrow to fund the interest payments for the loan to buy the shares?

Is there any rulings that deal with this circumstances? Would love to know the consequences and how will that benefit.

 

Yes there are 2 relevant rulings.

One says interest on interest is deductible if the underlying interest is deductible.

The other subsequent TR states that although deductible the ATO can applly Part IVA of the ITAA36 to deny the deductible if it is a scheme to pay off the home loan sooner.

You should seek tax advice on this before implementing.

 

Dear Terry,

Thank you for your advise. May I know Which are the two rulings so I could look up for more details before consulting to tax consultant? Looking forward for your reply. Thanks.

 

TD 2012/1


Income tax: can Part IVA of the Income Tax Assessment Act 1936 apply to deny a deduction for some, or all, of the interest expense incurred in respect of an 'investment loan interest payment arrangement' of the type described in this Determination?

TD 2012/1 - Income tax: can Part IVA of the Income Tax Assessment Act 1936 apply to deny a deduction for some, or all, of the interest expense incurred in respect of an 'investment loan interest payment arrangement' of the type described in this Dete

and


TD 2008/27


Income tax: is the deductibility of compound interest determined according to the same principles as the deductibility of other interest?
TD 2008/27 - Income tax: is the deductibility of compound interest determined according to the same principles as the deductibility of other interest? (As at 3 December 2008)

 

dear Terry,

does it matter if the interest on this interest are require to pay monthly in arrears while the principal is repayable on the same date as the loan.

 

I don't think that would change anything.

 

Thanks alot!!

 

hi, does the deductible amount (interest on borrowings to pay interest on the loan to buy the shares?) included in the principal borrowing's cost base?

or is separated and include into the cost base of the "interest loan"?

 

No offence to anyone from my side !!!!!! BUT this >>>> "One says interest on interest is deductible if the underlying interest is deductible" is the most sexy kind of schizophrenia crossed with the Aussie sun stroke I have ever heard of...

 

It would be claimable as an expense. if not claimed it could be used to reduce the cost base for CGT purposes.