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Interest on borrowings to pay interest

Discussion in 'Accounting, Tax & Legal' started by catherineW, 9th Aug, 2014.

  1. catherineW

    catherineW Member

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    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. :D
     
  2. Terryw

    Terryw Well-Known Member

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    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.
     
  3. catherineW

    catherineW Member

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    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.
     
  4. Terryw

    Terryw Well-Known Member

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    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)
     
  5. catherineW

    catherineW Member

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    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.
     
  6. Terryw

    Terryw Well-Known Member

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    I don't think that would change anything.
     
  7. catherineW

    catherineW Member

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    Thanks alot!! ;)
     
  8. catherineW

    catherineW Member

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    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"?
     
  9. Tropo

    Tropo Well-Known Member

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    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...:D
     
  10. Terryw

    Terryw Well-Known Member

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