Tax deductability of LOC

Hi all, wondering if you can help me with this tax question. lets say I have an LOC set up to buy shares, now if I bought shares worth 50k a while ago using the LOC, then the shares dropped to be worth around 12k and I sold the shares at that value, taking the 38k loss, would the interest on the 38k drawn down on the LOC still be tax deductable? seeing as i no longer own the shares?

 

Not according to TR 2000/2 example 5.

It seems the Commissioner applies a very simplistic view of the "use test". When the shares are disposed of there is a break in the use of the loan principle.

The shortfall is now regarded as financing a capital loss and so cannot be deducted, merely added to the cost base of the asset ... which you no longer have (doh !).

Note this disagrees with much similar case law where losses were incurred from past income activities, but they were to do with active income such as businesses.

Also note TD 95/27 allows a shortfall on disposal of an employee's asset.

Also note the legal opinion in the CCH Top 100 Q&As 2009 para 6-006 favours deductions for investors.

So you see this position is not clear ... in spite of it affecting a lot of people today.

As a parting warning, if you are using a LOC then the Commissioner is regards this as a rolling monthly refinance and he is entitled to review the purpose monthly !!!

So it would pay to get a legal opinion according to your exact financimg details.

Cheers,

Rob