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TR 2000/2 and capital loss

Discussion in 'Accounting, Tax & Legal' started by Rob G., 27th Nov, 2008.

  1. Rob G.

    Rob G. Well-Known Member

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    Melbourne, VIC
    I am still amazed at the implications of TR 2000/2 and interest deductibility in general.

    Whilst people who have sold out of a business and ceased with a deficit have been able to keep tax deductions on their loans for some years afterwards, the picture may not be so rosy for investors.

    Negative gearing (and even capitalised interest), have enabled people to get immediate deductions whilst financing deferred and discounted capital gains, it also relies on serious amounts of debt.

    With shortage of finance and declining asset values, some investors may be forced to sell assets at a loss.

    TR 2000/2 deems a disposal of the original investment to be a paydown of the loan and a redraw for private purpose if the funds are not used for another income-producing purpose (e.g. reinvested).

    What if you just pay all the proceeds back and cease investing, but you are stuck with a loan shortfall ?

    It seems the Commissioner now considers the purpose of the loan is to finance your capital loss and the interest is no longer deductible, but adds to some cost base.

    I am not entirely clear which cost base to add it to where you have already set off the capital loss against another capital gain in a prior year ?

    Luckily I am not in this position, but maybe somebody could elaborate for this forum ?

    Cheers,

    Rob
     
  2. GavinC

    GavinC Active Member

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    TR 2000/2 applies only to split loans and redraw facilities.

    ATOID 2003/841 considers deductibility in a more general sense and finds interest to be deductible on a loan after the company in which the shares were bought is liquidated.

    There is a notable revenue protection bias in public rulings issued by the ATO (understandable as they are binding on the Commissioner), but less so when reading ID's, as they apply only to particular taxpayers. Therefore I find ID's much more accurate in terms of what the ATO believes the law to be.

    The only comment in TR 2000/2 as to why the ATO believe a split loan or redraw eliminates the nexus between borrowing and deduction is due to remarks by the judge in FCT v Brown about business "rollover" loans. However these are much different from those used in split loan and redraw facilities.

    In my opinion TR 2000/2 is simply wrong in limiting the deduction as set out in their example at para 70.

    The cost base referred to in TR 2000/2 is the cost base of the asset in question sold for a loss. I don't know how you are supposed to accurately calculate your gain though if the cost base is increasing after you have sold it.
     
  3. Rob G.

    Rob G. Well-Known Member

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    Melbourne, VIC
    Thanks GavinC

    Unfortunately ATO ID 2003/841 doesn't elaborate on the finance method and whether the loan was also partly for continuing investment activities.

    The total ceasing of all investment activity is a strong attack for the Commissioner.

    The LOC being a rolling refinance is also an easy attack from Jones Case.

    The cost base allocation is truly confusing.

    Many thanks,

    Rob
     
  4. pthm

    pthm Well-Known Member

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    This is our scenario and we have a few questions on TR 2000/2:

    Say, we borrowed $100k from a line of credit (secured by our PPOR) to purchase units in a managed fund. The unit prices of the managed fund have tanked by 40% (truly! :mad:).

    If we redeemed all the units, then we would realise a massive cash loss. For argument's sake, say, we received $60K net proceeds from redemption. We repaid this amount into the line of credit. However, we still owed the bank $40K even though we no longer held any unit in the managed fund!

    Q1: Since there will still be interest payable on the $40K shortfall, can we claim the interest on this $40K as tax deductible going forward - even though there is no longer any underlying investment?

    Q2: What would the answer be, if we redeemed only half of the units, received $30K net proceeds, paid this amount into the line of credit, and still owed the bank $70K? Would the interest on the $70K be tax deductible - the underlying investment for the line of credit is still in place even though it is only worth half as much?

    Thank you for any thought / view / comment.
     
  5. Rob G.

    Rob G. Well-Known Member

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    Are you going to use the proceeds to purchase further investments ? In which case the shortfall should not be an issue since the full amount has funded income producing assets regardless of a diminished value.

    If you are just going to sell up and sit tight until the market improves then:

    1) The interest seems to be not allowable as a deduction, but adds to some cost base for a capital loss - BUT I DON"T UNDERSTAND SINCE THERE IS NO ASSET IN FUTURE YEARS AND HOLDING COSTS ARE NOT ALLOWED IN A REDUCED COST BASE SO IT IS PROBABLY TREATED AS AN INCIDENTAL COST OF DISPOSAL !!!

    2) Selling half - you will be deemed to have disposed of HALF for deductibility purposes.

    I suggest you contact the ATO for a private ruling. Merely asking them for a comment gives you highly conflicting views at the moment.

    I raised this thread to highlight the uncertainty in such a fundamental problem for investors.

    Cheers,

    Rob
     
    Last edited by a moderator: 17th Dec, 2008
  6. pthm

    pthm Well-Known Member

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    Thanks, Rob, for your thoughts. Appreciate it.

    Yes, we are thinking of getting out of the extremely bad investment, taking the cash to reduce the debt, cutting our losses, and not using the cash for further investment in this market.
     
  7. Rob G.

    Rob G. Well-Known Member

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    Can you renegotiate the loan for a more conventional form than a LOC ?

    As time goes by, and particularly each time the loan is refinanced, the Commissioner will look to the purpose of the refinance.

    A LOC is regarded by the ATO as a new loan each month !!!

    So each month the purpose of this "new loan" is getting more remote from your investment activity which ceased previously.

    Whereas negotiating a single enduring loan contract (of course with as favourable fee and repayment terms as possible) will help your argument.

    I think you should talk to an Accountant first to make sure all relevant details in your situtation are considered.

    Cheers,

    Rob
     
  8. pthm

    pthm Well-Known Member

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    Thanks, Rob, for further thoughts.

    We are at the limit with the bank for any more loan. Am not sure if bank would approve a "negotiated" loan without taking security. Current LOC is secured by our PPOR.

    Yes, we will talk to our accountant to check out the tax implications in doing all this.