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Still deductable???

Discussion in 'Accounting, Tax & Legal' started by Smartypants, 29th Nov, 2009.

  1. Smartypants

    Smartypants Well-Known Member

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    Ok, a hypothetical question here.

    Let's say I have invested in managed funds and also used a margin loan.

    I used funds from a few different loans (lines of credit) to purchase the mgd funds. Somewhere down the line I gave my bank possession of an unencumbered IP to get a new loan to pay out the margin loan.

    A while later I sell the mgd funds at a loss (due to GFC).

    From the proceeds of the sale I pay back the initial loans (lines of credit) and then access the funds again to reinvest (keeping the money still deductable). Because the mgd funds had fallen in value, there wasn't enough (from the sale) to pay the loan that was used to pay out margin loan, so this loan still stands.

    Is that loan (the one that has IP as security) still deductable now?
     
  2. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    It looks like it would be very complicated to work out the exact position due to the complexity of the funding arrangements.

    Generally you would need to work out which investments were funded from which borrowings and try and trace back the purpose of each borrowing and determine whether that borrowing is still being used for the investment purpose.

    "hypothetically" - I would be taking all the information to my accountant to sort out!
     
  3. Smartypants

    Smartypants Well-Known Member

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    Thanks Sim.

    If things pan out as in my example, I will definately be letting my accountant sift through everything, just trying to get opinions prior.
     
  4. Rob G.

    Rob G. Well-Known Member

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    Not enough information ...

    If you had a loan solely for an investment which you subsequently sell at a loss, and you used the funds to pay down as much of the loan as possible ...

    ... AND cease to use any proceeds for further investment ... then the interest needs to be added to the cost base for your capital loss.

    However, if the loan was contiuing to be used for ongoing investment (i.e. reinvested), then interest is deductible at least to some extent.

    Cheers,

    Rob
     
  5. Intellikev

    Intellikev Active Member

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    Still Deductible

    With the limited info available I believe the answer to be yes.

    The purpose or intention was the purchase of assets.

    Even after you sold the assets at a loss and if you then retained the debt and repaid the debt the interest the interest is still a deductible expense because the purpose of the loan was to purchase investments.
     
  6. Rob G.

    Rob G. Well-Known Member

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    I believe you are applying principles established in Case Law relating to business or personal services, e.g. FCT v Jones 2002 ATC 4135.

    The Commissioner appears to discriminate against passive investors, e.g. TR 2000/2 example 5.

    Therefore, if the outstanding loan only represents a shortfall on asset disposal then the Commissioner will argue the interest expense is solely to finance a capital loss.

    Conversely, if the asset proceeds are reinvested in other income producing assets this argument is significantly weakened.

    We do not have the full facts from the original post.

    Cheers,

    Rob
     
  7. Rob G.

    Rob G. Well-Known Member

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    Just had an interesting email from the editor of the CCH publication "Top 100 Tax Q&As", 2010 edition.

    I asked a question about example 6-006, deductibility of loan interest by an investor after sale the asset at a loss.

    The *general* approach seems to be to apply TR2004/4, i.e. continue claiming deductions if there is a shortfall.

    They limit the inconsistency of example 5 of TR2000/2 to the context of a line of credit or redraw with a mixed purpose, which they imply from the previous examples.

    Sooooooooo ... if you have a single purpose loan it may be possible to continue claiming the interest on the shortfall after disposing of the investment.

    It may pay to get some individual advice if you are in such a situation.

    Maybe I should ask CCH for permission to reproduce in full their response to my question ???

    Cheers,

    Rob
     
  8. pthm

    pthm Well-Known Member

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    Hi Rob

    If it were possible, could you please ask CCH for permission to reproduce in full their response to your question? I would be interested in reading it. Many thanks!
     
  9. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    I reckon you might be onto something here.