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Margin loan, CMA & interest deductibility

Discussion in 'Accounting, Tax & Legal' started by tasmo, 18th Jul, 2006.

  1. tasmo

    tasmo Well-Known Member

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    Hello tax knowledgeable forumites,
    I was talking to my helpful margin loan account managers, with the topic of the margin loan linked Cash Management Account (CMA) benefits queried by myself.

    Among other benefits, the staff person said she had been told that, as the CMA account was an investment account, a drawdown of the loan into the CMA would be considered an investment purpose and the interest on the loan funds tax deductable. This would be true even if you subsequently drew the funds from the CMA account for non investment usage.

    To me I doubted that this is true, and I would be interested to hear other views on the interest deductability of loan funds drawn down into CMA and then drawn from CMA for personal usage.

    Cheers,

    Tasmo
     
  2. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    I suspect the ATO would treat a drawing of funds from the CMA for personal use to be considered effectively as a loan repayment and subsequent drawing of funds from the loan ... and hence non-deductible if it was for personal use.

    The other thing the ATO might get you on is that drawing funds out of the loan to "invest" in the CMA is a non-commercial arrangement (there is no expectation of profit, since the CMA earns less return that the loan) - hence they would probably disallow the deduction anyway.

    I suggest that the staff at your margin lender need to be extremely careful about the "advice" they give out - it seems they are misleading their customers and potentially breaching the law in doing so.
     
  3. Nigel Ward

    Nigel Ward Team InvestEd

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    Sim is too polite :D

    I think your margin lender's helpful person is talking complete bollocks :eek:

    Cheers
    N
     
  4. tasmo

    tasmo Well-Known Member

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    Sim, appreciate your comments, and your considerable work in maintaining InvestEd.

    I agree if by "loan repayment" you mean drawing on loan funds. However I think this is where margin lending officer was infering that the ATO would not look beyond the transfer of money from margin loan to CMA to determine pupose of loan, and that technically the transfer complied with purpose of loan criteria.

    I'm not sure commercial arrangement (profit) is relevant for interest to be a valid investment/business expense. Interest expense is simply an expense inccured in business, claimable regardless of how effective it is in
    generating profits. The ATO role is not to tell you how to run your business by setting profitability criteria.

    Take the case of interest prepayment, where it is often quoted a small interest rate discount (say 0.5-1%) gives 'commercial arrangement' purpose. Well this is obviously not true, as a rate discount of say 1% on prepayment, means your prepayment funds are earning 1% which is a loss making effort compared to virtually any other use of the funds.

    For your consideration,
    thanks,

    Tasmo
     
  5. tasmo

    tasmo Well-Known Member

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    Nigel, appreciate your forthright comment. If there was a possibility the lending person was correct, it would make the CMA account very very useful.:)

    Cheers,
    Tasmo
     
  6. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    I suspect that if it were as simple as taking loan proceeds and depositing them into an interest bearing account (thus supposedly making the loan interest deductible), regarldless of what the money is subsequently being used for - then it would be a standard tax minimisation strategy recommended by all accountants ... ie. everyone would be doing it.

    It's not - therefore I believe it is not a valid strategy. I'm sure Nick will verify this.
     
  7. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Actually - there are provisions in the tax act that deal with non-commercial losses and such, but generally they only apply to business operations, and investing is not considered to be running a business (in most cases).

    But there are also provisions that cover "aggressive tax planning", which uses phrases such as "doing something that makes poor business sense, and the only benefit is going to be a reduced tax liability".

    I'm not saying these necessarily apply here, but you do need to be careful.

    Actually, your example is quite good enough for the ATO - they make no assumption that you would otherwise be investing the money and earning a higher return - indeed, you could quite reasonably have it sitting in a non-interest bearing account. So you can reasonably expect to gain a direct benefit by pre-paying interest - irrespective of what else may be possible.

    However, if your investing directly leads to a loss, with no prospect of future gain - the ATO have indicated in the past that they will look closely at such arrangements (unlike negative gearing, where there is an expectation of future gain by either capital growth or income eventually being more than the losses).
     
  8. -T-

    -T- Well-Known Member

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    Hey Tasmo

    Just quickly, what advantages do you perceive here? Other than avoiding tax on personal purchases, how does borrowing money at x% and investing it at x-y% make any sense? I'm obviously missing something here, but I never really did get using cash management accounts. You can get better rates, no minimum limits, no fees, etc from an online account (e.g. 5.81% for $1). Is there something obvious that I'm completely ignorant to?

    Thanks
    -T-
     
  9. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    The only advantages I can see from a CMA is one which offers full access via ATM and/or cheque book ... but I still think you'd be better off with a normal transaction account linked to a high interest online savings account.

    I never really got the whole CMA thing either.
     
  10. tasmo

    tasmo Well-Known Member

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    Hi -T-, Sim,
    Yes I agree with all comments, and really a CMA appeared of little use to me.

    However with my margin lender (StG) a CMA account was required, as when I switched to them they said Platinum Asset Management would not pay distributions directly to my bank account and the only options were margin lender CMA account or reinvestment into fund.

    The one positive feature of the CMA for me, is that the account provides colateral to the margin loan account without depositing funds into the margin loan and reducing the tax deductable loan balance. Thus if the margin loan progesses to the limits of the buffer region and faces a margin call, I can temporarily deposit funds into the CMA account to prevent the margin call, without impacting on the loan balance. I would then have the option of retriving funds back to my offset account if market improves and buffer is no longer active, or if required, commit funds to the margin loan.



    cheers

    Tasmo
     
  11. MrDarcy

    MrDarcy Well-Known Member

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    I have the same arrangement and thought it a pain at first. But not so for the reasons above. It is like an "offset account" for margin calls ! Of course, I don't leave anything in there unless I have to.

    BTW, Yesterday Suncorp direct debited $30k for a new fund purchase from the wrong Westpac account and overdraw it. A quick call and fax to Suncorp fixed their error. But ! This morning I've got a $30k credit balance as they fixed their error at the same time the bank dishonoured their debit. I'll tell them in a couple days :D
     
  12. -T-

    -T- Well-Known Member

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    Thanks Tasmo, I see your reasoning now.