Join our investing community

Question about Tax on Margin Loans

Discussion in 'Accounting, Tax & Legal' started by noob, 2nd Jul, 2012.

  1. noob

    noob New Member

    Joined:
    2nd Jul, 2012
    Posts:
    2
    Location:
    Kenmore
    Hi,

    Been hearing and reading things and have a question about taxation on a margin loan.

    If i was interested in purchasing a margin loan of say $10k with a 9% rate would the interest (10k x 0.09=$900 ) be all tax deductible? Or only partial ?

    Second question if the 10k loan has a LVR of 53% i have to hold 47% of the other shares i want to purchase. Then am i to assume i will receive only $5300 from the loan and i put in the the other $4700 (worth of shares)? or the 53% represents the 10k portion and i put up the 47% ($8800?).

    Thank You in Advance!
     
  2. Terryw

    Terryw Well-Known Member

    Joined:
    9th Jun, 2006
    Posts:
    653
    Location:
    Sydney
    Noob,

    You don't purchase a loan, but take one out.

    If you borrow money and use it to purchase shares then the interest would generally be deductible.

    If you borrow $10,000 and have a portfolio of $20,000 then the LVR will be 50%. You will get dividends based on the $20,000 worth of shares, but will be only paying interest on the $10,000 loan.
     
  3. GregR

    GregR Reid Consultants

    Joined:
    13th Jul, 2009
    Posts:
    273
    Location:
    Berwick Vic
    Noob,
    Terry is correct.
    If you want to purchase $20k in shares, you can purchase these outright with your own funds or you can use a loan to help finance the purchase.
    You could get a personal loan for $10k as an option.

    A margin loan is a loan that is secured against the shares themselves, the amount lenders will lend will be determined by the share mix itself, different shares have a different maximum LVR against them but 50% is reasonably conservative. If you borrowed $10 as a margin loan, you will need $10k from your own funds to purchase $20k of shares. You own the shares and receive dividends on these (if applicable).

    As Terry said, the interest cost on the margin loan will be tax deductible. Be aware of the risks involved in margin loans and make sure you have a comfortable buffer and contingency funds.

    Greg
     
  4. noob

    noob New Member

    Joined:
    2nd Jul, 2012
    Posts:
    2
    Location:
    Kenmore
    thanks guys much appreciated!