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redraw of margin loan

Discussion in 'Money Management' started by Bob, 16th Jun, 2007.

  1. Bob

    Bob Well-Known Member

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    In a conversation the other day I was told that if you draw down on your margin loan then that can be used for any purpose - (eg getting drunk in Pitt St) yeah OK, but then that loan still is tax deductible. Now I questioned this due to the intent of the borrowings (Hahn Premium), but was told it was the original intent of the borrowings that determined the tax deductibility. Am I wrong?

    Thanks
     
  2. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    No, you are correct (the other person is wrong).

    A draw down on your loan is a new borrowing ... and it is the purpose of this new borrowing which determines the deductibility. It will NOT be deductible if used for personal expenses.

    Whoever told you otherwise is likely to get a nasty surprise one day when the ATO comes knocking.
     
  3. MattR

    MattR Well-Known Member

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    This happens to often. You can use subaccounts if you have a LOC to keep the investment loan clean of any personal movements/transactions
     
  4. transit

    transit Well-Known Member

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    So how does one withdraw funds from a margin loan for personal use?

    Actually a better way to put it is how do i withdraw any profits from selling shares for personal use without muddying the deductability of the interest?

    Say i buy 10,000 shares of XYZ for $1 and sell them for $1.20. When i sell them, the proceeds of $12,000 (less brokerage) is deposited back into the margin loan. How can i access the $2,000 profit from the margin loan for personal use?

    Or is it easier to transfer the shares from the margin loan account to the normal commsec account and then sell them through this account?

    Hope this makes sense? :confused:
     
  5. Simon

    Simon Well-Known Member

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    With the first option - if you redraw the $20K it will be seen as a fresh loan.

    The second will work.

    Remove them from the margin loan (assuming you have suffient security remaining to support the loan). Sell the shares then deposit funds into the margin loan to cover the initial purchase price - interest too if it has been capitalised.

    Cheers,
     
  6. transit

    transit Well-Known Member

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    thanks for the quick reply Simon, much appreciated and it makes sense to me :)
     
  7. coopranos

    coopranos Well-Known Member

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    You should be able to specify with your margin lender where you want the proceeds from the sale to be put. Get the entire proceeds put to your bank account, then transfer from your bank account to margin loan the original cost, and the profit put into your non-deductible debit, then maybe rip it back out of there and buy some more shares and transfer them to your margin loan.
     
  8. seaview

    seaview Well-Known Member

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    Another idea - don't sell anything

    How about you open a second margin loan account and transfer some shares into it. Lets call this margin loan account your personal spending kitty.

    The interest on money drawn from this loan can even be capitalized but is NOT deductible if used for personal expenses. The shares in this second margin loan act only as security and are still a valid investment asset, the debt for which is still deductible, and indeed is still capitalizing away in your first margin loan (investment account).

    This idea is fairly similar to setting up a LOC against an IP and using funds to live on.
    We have been toying with the above strategy, but not for personal use, although I think it would work too.
    We plan to use such a 2nd margin loan solely for a deposit on a blue chip city IP. The IP deposit debt is capitalized in 2nd margin loan, and should still be deductible against the IP. This only leaves us having to cover 80% loan against new IP, which the rent should come close to covering. If the rent does not cover it, we plan to make small cash advances against our 2nd margin loan IP kitty to top up shortfall. That preserves our cashflow.
    Another benefit of doing this is that it is repeatible and can be used to buy lots of properties (if you have lots of share/M Fund equity to spare).
    Also, it keeps IP and Share/Mfund debt separate from each other, and separate from personal debt (if used for that purpose). Best of all it helps fund blue chip IPs without impacting cashflow too much.
    I am reluctant to share this idea because if everyone does it, the tax office may jump on it, but what the heck.
    Naturally, if you ever sell the bundle of shares used as security for 2nd margin loan, all debt and capitalized interest has to be paid on both margin loan accounts.
    But by keeping them you avoid CGT and hang on to a good growth asset.
    Oh, the shares securing 2nd margin loan also need to be good growth ones to allow interest to capitalize.
    Please feel free to rip this idea to shreds. Feedback is welcome.
    Cheers
    Seaview
     
  9. bundy1964

    bundy1964 Well-Known Member

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    I don't think you need to get that complicated if your drawing a deposit for an ip since it is still deductable. Private funds a seperate loan would work out well, even if it is meant to only be used for business/investment purposes.
     
  10. seaview

    seaview Well-Known Member

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    The reason we plan to have a separate margin loan for our IP deposit is because if we sell the IP we can easily identify and pay down all the interest .

    The alternative scenario: if the IP interest is intermingled with managed fund debt in one margin loan, surely it would be a real pain trying to separate out the property portion as it will all be capitalizing away together each month.

    Imagine if you did not sell the IP for 10 years, then had to go back and calculate each months portion of IP debt in order to pay it down. If you did not pay it all down, I suspect the part not paid down would cease to be deductible ??

    Thus the loan would be contaminated with non deductible debt. (A BIG pain - we have just cleared a bank loan that was intermingled.)
    Also, annual tax returns usually require us to state what the IP debt is so we would have to do this monthly interest separation anyway.

    I would love a simpler way to do it, but in the long run I think this is the easiest, and it helps to keep these debts separate. It is quite easy to open a second margin loan anyway.
    Cheers
    Seaview

    :)
     
  11. Alchemy

    Alchemy Alchemy

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    Deducting loan interest if you made a loss on your shares/CFDs and ceased trading

    As a related query, can anyone offer more information on claiming personal loan interest for shares if you actually made a loss and ceased trading?

    My scenario is where one took out a personal loan to purchase shares/CFDs and then lost most/all of their portfolio in the financial crisis such that their portfolio (and savings etc) was insufficient to pay off the remainder of their personal loan. I imagine many people would be in this boat since 2007-08.

    My understanding from point 3 of Ten traps to avoid at tax time | Money | News.com.au is that one would 'generally' not be eligible to continue claiming personal loan interest for shares/CFDs if one ceased trading. Now that is understandable if one decided to cash in their portfolio and go on a holiday but would it be interpreted differently if one had lost money on their share portfolio i.e. their intention was still to make money from share/CFD trading as opposed to using the funds for private expenditure.

    I guess my question does one's intention influence whether the loan deduction will still be allowed? If not it would seem to be a double whammy - to lose money on the market and then not be able to claim the remainder of the loan interest. Although I see the counter argument would be that the loan is not being offset by any income and is therefore not deductible.

    On a slight tangent, what if one decides that the trading conditions are too uncertain for the next several days/weeks/months but keeps their money in the stock/CFD account (as they still intend to trade in the future) and then resumes trading after that period as they believe conditions have stabilised. Does one have to apportion that period(s) loan interest as non-deductible?

    Any guidance anyone?
     
  12. lorrimer

    lorrimer Well-Known Member

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    The funds that you draw down from the margin loan are not taxable anyway and could therefore be likened to a tax free form of income. You wouldn't therefore also expect to receive the benefit of tax deductability on the drawn funds. That would be like having your cake and eating it as well ! Or is the real issue that one is in danger of contaminating the whole margin loan if you use just the drawn down amount for personal use? Could someone please clarify. Thanks
     
  13. Rob G.

    Rob G. Well-Known Member

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    1) CFDs

    TR 2005/15 deems CFDs to be merely gambling if you are not a business (check TR 92/3) or you transactions are not of a commercial nature.

    i.e. individuals dabbling with CFDs will not derive income nor be allowed to deduct losses or interest on borrowings.

    2) Investor losses.

    TR 2000/2 deems a recoupment when the original securities are sold. Consequently any shortfall is deemed borrowing to finance a capital loss so the interest is not deductible (see example 5).

    This is a different treatment to businesses, and also different to people deriving income from personal services (see TD 95/27 employee's car).

    Cheers,

    Rob
     
  14. transit

    transit Well-Known Member

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    Yes, i believe this is the issue.