Tax deductability question

I have the following situation:

Borrowed $240k to purchase four managed funds - say each fund at $60k each for ease. Interest on loan is deductable.

Managed fund values have dropped to total of $220k ($20k paper loss). Interest on $240k is still deductable.

I am looking at selling three of the managed funds (which would realize the paper loss on those funds... selling at $165k for which originally cost $180k) - and would reduce the loan to $75k. Is the interest on the loan still fully tax deductable?

Thanks,

Jason

 

Agreed.

Sim would make a good accountant.

 

Thanks for the response.

Another thing - if in the same scenario I sold one of the managed funds (at a loss) but used to funds to purchase another income producing asset (eg. switched which managed funds the money was invested in), then is the full original loan still deductable?

Regards,

Jason

 

The fact that an investment no longer pays income does not alter the original purpose of the loan.

Therefore the interest would still be fully deductible. The correct ruling to refer to would be TR 2004/4.

The interest or part thereof would only be non-deductible if loan funds were subsequently used/redrawn for private purposes, in TR 2000/2 as Sim noted.

 

TR 2004/4 asks more questions than it answers. For the loan to stay entirely deductible it says that you only don't pay out the remainder because it's beyond your financial means to do so ... which might be difficult to prove if you go and invest elsewhere.

D

 

TR 2004/4 refers to case law for business.

TR 2000/2 still discriminiates against investors, where investment has ceased.

However, where the loan is financing an ongoing investment activity then interest remains deductible notwithsdanding that you may have realised a few investments at a loss and reinvested the proceeds.

Cheers,

Rob

 

Am in a similar situation to Jason (the starter of the thread), and seek to clarify my understanding before I do anything.

I have borrowed (a loan secured over home) to invest in a managed fund. For argument sake, the loan is $100K. As we all know, the managed fund unit price has dropped considerably - say 40%. So, I have an unrealised capital loss of $40K.

If I were to get out of the managed fund and redeem all the units, I would receive $60K cash and carry forward the $40K capital loss to future tax years until I could offset it against capital gains (hopefully!)

My understanding is as follows:

1. If I were to use the $60K net proceeds from getting out of the bad managed fund to repay the initial $100K loan, then the question would be whether I could continue to claim the interest expense on the $40K loan balance? The answer was "Yes" - because I cannot afford to repay all the loan at this stage. Eventually, I will have to repay the loan somehow - else the bank will repossess my house!

2. If I were to put the $60K net proceeds into another type of investments such as a new managed fund, or a deposit for an investment property, then the question would be whether I could continue to claim the interest expense on the initial $100K loan? The answer was again "Yes" - because the loan is continued to be used for generating assessible income.

Please correct me if I am wrong. Thanks for your views.

 

Cheers,

Rob

 

Thanks, Rob, for your quick reply.

Not sure which action I will take. It has been a very bad investment and I need to get out of it before my head is deeper in the sand! - even though I will realise a "real" cash loss and a capital loss. It is not likely that the investment will likely to improve and the fall in unit price (resulted in a capital loss) is permanent!

 

Refer to my post:

http://www.invested.com.au/4/still-deductable-37129/#post76454

It may not all be bad news.

Cheers,

Rob

 

Many thanks, Rob, for the link. I have now confirmed with accountant and the answers are yes. One of my strategy was bailing out of the bad managed fund, coped the capital loss, and put the money down as a deposit on a property. Then hold it for at least 5 years, sell it (hopefully with a capital gain) to recoup the carried forward capital loss. Last week I missed out on a great deal, and was very upset with myself - it would have worked if I had done things differently. However ...: mad: