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Tax deduction for using loan to pay investment interest

Discussion in 'Accounting, Tax & Legal' started by evisional, 1st Nov, 2007.

  1. evisional

    evisional Well-Known Member

    Joined:
    23rd Aug, 2007
    Posts:
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    Location:
    Melbourne
    I have a question:

    If I borrow money from margin loan to pay for the margin loan's interest, does the interest of this borrow is tax deductible?

    Case 1: Payment 1 year interest in advance

    30/6/2007: borrow margin loan of $100,000.

    30/6/2007: prepay 1- year interest of margin loan (9%): $100,000 x 9% = $9,000 (tax deductible).

    Each month from 1/7/2007, : pay the interest on interest prepayment: $9000 x 9%/12 = $67.50

    Is the amount $67.50 subject to tax deductible?

    Case 2: Direct debit margin loan to pay interest at the beginning of each month

    - Borrow margin loan: $100,000
    - Direct debit the margin loan to pay for interest at the beginning of each month.
    - Interest payment at the beginning of each month includes the interest on the direct debit relating to previous months's interest payments?

    Are all interest payments subject to tax deductiable?

    Thanks
     
  2. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Location:
    Sydney, Australia
    Generally all interest payments are tax deductible, no matter where they are paid from (ie. cash or equity).

    Interest on interest for a margin loan should be tax deductible - but that's something to double-check with your accountant.

    By the way - you usually don't pay interest monthly in advance (although I know some lenders offer this, I don't see the point) ... generally it is interest monthly in arrears. If you pre-pay interest, it is usually for at least a year (make sure you get a reduced interest rate if you pre-pay, otherwise the ATO might disallow the prepaid deduction :eek: ... you have to be getting a benefit from the pre-payment other than the additional tax deduction)
     
  3. evisional

    evisional Well-Known Member

    Joined:
    23rd Aug, 2007
    Posts:
    51
    Location:
    Melbourne
    Comsec Margin loan provides a option which allow borrowsers
    to add monthly interest to the loan balance? I wonder if I can claim tax deduction for all monthly interest stated in on the Comsec statement?

    Please note that the monthly interests includes the interest on previous months' interest.

    If not, how can I separate the interest on interest and interest on margin loan if I add interest to the loan balance?

    Thanks
     
  4. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Yes, this is called capitalising interest.

    It should all be tax deductible (I claim it), but check with your accountant or tax advisor to make sure it is okay for your situation.
     
  5. evisional

    evisional Well-Known Member

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    Melbourne
    Thanks a lot Sim. This is a great forum!:cool:
     
  6. NickM

    NickM Co-founder Staff Member

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    20th Jun, 2005
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    these rulings will help you
     

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