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Margin Loans Margin Loan strategy

Discussion in 'Finance & Banking' started by Liverpool St, 9th Mar, 2008.

  1. Liverpool St

    Liverpool St Well-Known Member

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    Could someone give me some guidance regarding my margin loan? I have a corporate structure HDT with some Navra fund shares and a margin loan. If I place some personal funds inside the margin loan to bring down the LVR can I later access the funds from the margin loan and then use them for personal usage. I guess what I am asking is can I loan funds to the margin fund to lower the LVR and reaccess them later on when the market picks up?

    Thanks

    Liverpool St.
     
  2. tasmo

    tasmo Well-Known Member

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    Liverpool St, all funds deposited into a margin loan are regarded the same by the tax office, simply as principle repayments. When you withdraw funds, the usage of the withdrawn funds determines their tax status.

    So depositing personal funds into your margin loan and later withdrawing the same amount for personal use with mean part of your margin loan will then be classified as being used for private purposes. Every time you make a payment on your margin loan you will have to apportion some to deductible loan and some to non deductible loan for taxable interest purposes; i.e., you will be need to keep a constant track of deductible interest and non deducible interest for the life of that loan. A real pain, unless you have sophisticated software, that only required a once off entry to classify and track your taxable interest component for the life of the loan. Not forgetting the worst part, that you have converted a portion of your taxable interest loan into a non taxable interest loan.

    Most margin lenders have linked deposit accounts to loans, such as cash management accounts. Any deposits in these accounts usually are treated as security for the loan with a 100% gearing ratio attached. Due to the manner in which percentages are calculated this is actually slightly more effective in raising your maximum gearing ratio/maximumum borrowings, than paying down your loan with the same amount. I'm quoting this from my current experience with SGML.

    So depositing to a linked Cash management/savings account is a good option. You will not be able to access those funds until you are out of your margin loan buffer, and this could be some time under current market conditions. Also you are losing a bit between the interest rate the CMA pays and the loan rate, but this is small consideration when you are in margin call territory.
     
  3. Billv

    Billv Getting there

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    Liverpool St mate
    Let me ask you a question.
    Do you have the means to pay back the loan by getting money from a LOC or in some other way?
    The real question though should be, why put more money into a losing deal?
    The share market correction is likely to last for another 15-24 months
    and your investment is likely to fall another 25% or perhaps more
    so it's not that this is the only time you will be required to top up the loan.
    IMHO
     
  4. tasmo

    tasmo Well-Known Member

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    BV, you raise a very good point about committing more money when the outlook is so negative. However it is the financial sector that is suffering the most. The demand for commodities from emerging nations is unlikely to abate, and they look like a good investment that will be spiralling up in conjunction with the global inflation that the FED of USA is generating with its 'cash rate' cuts.
     
  5. Liverpool St

    Liverpool St Well-Known Member

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    More on margin loans

    Thanks Tasmo/BV,

    My original question was more of a hypothetical. I am sitting on 54percent LVR with LE and have a cash buffer which if placed in the margin loan would bring down the LVR to about 40percent. Basically, I just wanted to know if I could access it again for private usage.

    Thanks

    Liverpool St.
     
  6. crc_error

    crc_error The Rule of 72

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    I spoke to my accountant about this, and he has never heard of a case where the ATO audited a margin loan to determine its tax deductability. So the chances are it should not be a problem if you redraw for personal use.
     
  7. Billv

    Billv Getting there

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    Just because the probability of being caught is low it doesn't make it legal
    IMHO
     
  8. tasmo

    tasmo Well-Known Member

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    crc_error, Interesting to hear that the tax office does not audit on margin loans deductibility. The tax office has a strategy of targeting particular groups of tax payers. The target groups change from year to year and they could easily decide margin loan holders need some public examination. As BV mentions it is also contravenes tax law to claim interest deductions on loans for private usage.

    In my view if you claim tax deductions on the fringes you are setting yourself up for future problems that are really unnecessary.
     
  9. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Also don't forget that the tax office can and will audit previous years returns as well - so it's not just a matter of "getting away with it" once - it can easily come back to bite you (with interest) in the future.
     
  10. MrDarcy

    MrDarcy Well-Known Member

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    Be aware that some lenders will sweep the CMA account and apply to the loan automatically. Suncorp does that and then, even if you didn't intend to pay down the loan, it has been and redraw for private usage will change the character of the interest.
     
  11. tasmo

    tasmo Well-Known Member

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    Mr Darcy, The default option with SGML is as you say, to automatically sweep the CMA funds into the loan account, however, you can have your account restricted, which means you instruct SGML by fax or letter, on the movement of funds from your CMA account.