Margin Loans Margin loan: to prepay or capitalise?

Discussion in 'Sharemarket Investing Platforms, Tools & Services' started by Glebe, 21st Apr, 2006.

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  1. MJK__

    MJK__ Well-Known Member

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    Yes I agree with that. As long as its actually being charged/debited from your account in the relevant financial year it is an expense incurred for that year.

    It was the bit where Glebe said

    "I know that for the next financial year I'll be borrowing $500 000 so I pre-pay the interest on my $500 000 margin loan ($37 500 interest), so my taxable income is now $63 500."

    It sounded to me that the interest may not be charged or debited or capitalised or payed in the correct financial year so to speak.

    In my opinion if it is charged to the account in the correct year it sould be ok.

    Opinion only

    MJK :D
     
  2. Mark Laszczuk

    Mark Laszczuk Well-Known Member

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    Nick,

    Would you suggest that people get a private ruling in regards to this or would the ruling you posted be sufficient?

    Mark
     
  3. Simon

    Simon Well-Known Member

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    In a rising market this works well. In a sustained Bear Market you are just delaying the inevitable hoping for the market to turn and turn hard before you run out of LVR.....

    But I capitalise interest myself. holding a portfolio of solid blue chip shares and funds I am confident of growth over the medium term and beyond.
     
  4. Glebe

    Glebe Well-Known Member

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    Thanks alot Nick :) Great stuff.

    Now onto my next challenge of finding a broker that allows shares to be bought in the name of my company trustee and linked to a margin loan in my wife's name. Why do I make things so hard for myself!
     
  5. Glebe

    Glebe Well-Known Member

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    Hehe, have bought an Aussie bulldog instead which is fancy name for a bulldog/boxer cross. I've uploaded a photo of her here:

    http://en.wikipedia.org/wiki/Australian_Bulldog

    I'll get a boxer one day :)
     
  6. gazza

    gazza Well-Known Member

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    At the tax minimisation seminar in Sydney the other night, Steve put forward the proposition that to prepay interest was merely shifting your tax debt from one year to the next (merely delaying the inevitable). His view was rather to capitalise the interest and then use the new tax optimising strategy he was launching, to reduce your taxable income each year. If you wanted to prepay interest, you have to find that money somewhere eg. line of credit or cash, etc, whereas by loaning the money to buy an agri product and then taking your tax refund received as a result and investing that in an income fund (along with a margin loan of an equivalent amount), you do not have to come up with any money out of your own pocket and your tax liability is sorted out. The income from the fund then pays for the cost of the loan and potentially over the period of the product loan, the loan is paid off meaning you end up with paid off units in the fund (less the value of the margin loan) and no tax liability.
     
  7. hillsguy

    hillsguy Well-Known Member

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    OK ... thanks for everyone's input here. Very good topic indeed !

    I have just done all the number crunching and decided to capitalise interest on Margin Loan for the Navra fund.

    I am however still trying to understand if I can deduct the interest the year I capitalised. There were 2 comments made in this thread however no clear answer.

    In my view ( no ...I am not an accountant ) as Michael has mentioned before ... " Although the interest is not being physically paid, it is charged and you do need to pay it at some stage" I don't see why it cannot be deducted for the year you capitalised it.

    Anyone kind enough to share their thoughts ? No doubt we have some forumites presently capitalising interest on Margin Loans ?
     
  8. Simon Hampel

    Simon Hampel Founder Staff Member

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    You have incurred the obligation to pay the interest ... and you ARE paying it ... from your margin loan account.

    It is deductible.

    The question is whether the interest you incur on that borrowing is subsequently deductible ... and that, you should get professional advice on ... but my personal (non professional) opinion is that there is no problem there.
     
  9. hillsguy

    hillsguy Well-Known Member

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    Thanks Sim.

    Definitely a messy exercise if each year you have to separate the previous year's deducted interest ?

    I think I finally am getting it ... :cool:
     
  10. Jane M

    Jane M Well-Known Member

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    Thanks everyone for a great thread.

    I have another question re a Margin Loan. Let's say there is 100K profit in the account - can I repatriat this profit to a personal account, reducing non-deductible debt? Of course I will be paying tax on the capital gain and trading income, so my logic says I can do what I like with the profits.

    I have asked this question before.
     
  11. Alan__

    Alan__ Well-Known Member

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    Sell units that have undergone Capital Growth, pay CGT Tax and use the remaining proceeds to pay down non-deductible debt?

    I'm certainly no accountant, but.......sounds good to me. :)
     
  12. Simon Hampel

    Simon Hampel Founder Staff Member

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    Not sure I understand you here ... "profit in the account" ?? What do you mean ?
     
  13. Jane M

    Jane M Well-Known Member

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    Sim
    I am mainly trading - holding shares for just a few days. The equity has built significantly in the margin loan account - say 100K. This is effectively profit from trading activities, on which tax will be paid.
     
  14. Simon Hampel

    Simon Hampel Founder Staff Member

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    Hangon - the margin loan account is a LOAN. Are you "building equity" ? ... or are the proceeds from your trading being paid into your loan account, thus decreasing the outstanding balance ?

    My point is ... if your profits are being paid into the loan account, you are paying down the loan, and any drawing you take from that account is effectively a new borrowing.

    If you use that drawing for personal expenditure, the interest on those drawings will NOT be tax deductible.

    Your margin loan is just another LOC - works exactly the same way as a LOC against a property does when it comes to tax.
     
  15. MJK__

    MJK__ Well-Known Member

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    :eek:
    I would have thought it impractical for a trader to buy from one loan acount and have sell proceeds paid to another to separate profits from the loan repayments?
    I would have thought most traders would use one loan account for buys and sells and just keep track of what is profit and what is loan repayment?

    Or... do traders take money from there loan account into a separate trading account?

    MJK
     
  16. Simon Hampel

    Simon Hampel Founder Staff Member

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    I suspect they do as you described ... the problem is that the ATO doesn't care whether it is "profit" or a "loan repaymen". At the end of the day - if you are pulling money from a LOC (or margin loan), it is the purpose of that drawing which determines the deductibility - not the purpose of the deposit !!!

    How do traders manage this ? I dunno - I'm not a trader - you'd have to ask one.

    It's not an issue if you aren't leveraging your trades :rolleyes:
     
  17. Jane M

    Jane M Well-Known Member

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    Sim and others

    Thanks again. What I am currently planning is to close the account in June. Send seed funds back to whence they came (property LOCs). Send profits to personal accounts, because I will be paying tax on them anyway.

    Then start a new account for the next financial year. Anyone see any problem with this?

    I think I would really benefit from an article on how to manage a Margin Loan. For both trading and investing, or maybe this is the problem?
     

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