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Margin loan and REAL Interest rate?

Discussion in 'Accounting, Tax & Legal' started by gad, 10th Jan, 2007.

  1. gad

    gad Well-Known Member

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    Margin loan and REAL Interest rate?

    I understand that everyone’s tax situation is different but I was wondering if anyone knows or has an estimate as to how much the tax deductibility of interest would reduce that interest rate?
    ie if I was paying 8.5% interest on a margin loan, would, in effect, claiming that interest reduce that rate to say something like 6%?
    Any ideas? Thanks.
     
  2. handyandy

    handyandy Well-Known Member

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    Hi Gad

    I would think it really depends on your situation.

    In the case that you are positively geared ie the income from the investment is greater than the cost of the margin, then no interest is deductable against the investment income. In this case the income - interest cost = earnings which you would declare and pay tax on.

    In the case where you are negatively geared ie the income from the investment is less than the cost for the margin loan, then some of the cost of the margin loan would be tax deductable. If you were on 48% tax then the equation is interest cost - income = the loss which would be tax deductable. You can work this out on a % basis 8.5%(margin) - 5.5%(income) giving you a 3% loss and at 48% tax would give a tax deduction of about 1.5%.

    Cheers
     
  3. gad

    gad Well-Known Member

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    Hi handyandy

    Thanks for that. I have been giving it a bit more thought & should be able to work it out myself.

    Thanks
     
  4. tasmo

    tasmo Well-Known Member

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    HandyAndy, I cannot agree with your explanation. Positive or negative gearing is irelevant as to the deductibility of 'interest expense'. The key word being expense. In both cases 'interest expense' is a deductable item subtracted from gross profit/revenue of your business or investment activity.

    Examples:
    1) 8.5% interest rate * (1- 0.45 ) marginal tax rate 45%
    = .085 * 0.55
    = 0.0468 = 4.68% effective after tax interest rate

    2) 8.5% interest rate * (1 - .3) marginal tax rate 30%
    = .085 * 0.6 = 0 .051
    = 5.1% effective after tax interest rate
    correction
    =.085*.7 = .0595 = 5.95% effective after tax interest rate
     
    Last edited by a moderator: 11th Jan, 2007
  5. gad

    gad Well-Known Member

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    This is what I was talking about.

    The interest on the margin loan is tax deductable against income (even if I make a loss or gain from the investment itself) as the purpose of the loan was for investment. I was just trying to get an idea of what the true amount of interest would be after that interest had been claimed.

    So, in my situation, it looks like it's app. 5.1% rather than the 8.5% being charged, if you see what I mean.

    Thanks
     
  6. handyandy

    handyandy Well-Known Member

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    This is based on no earnings to offset the interest paid.

    My explanation is based on the investment having some income which will reduce the deductability of the interest as the interest is netted off against the income.

    Cheers
     
  7. Glebe

    Glebe Well-Known Member

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    In example 2), don't you mean:

    = .085 * 0.7 = 0.595
     
  8. tasmo

    tasmo Well-Known Member

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    Glebe, yes I did mean that, thankyou.

    Cheers,
    Tasmo