To all you financial/tax experts out there:
I know that i can go to the bank and take out a loan specifically for the purposes of purchasing shares as an investment.
Say i borrow $100 000 through some type of bank loan.
Let's assume that in under 12 months (during a certain tax year) i have made $10 000 profit through the sale of these shares.
Let's assume furthermore that the interest on the loan was 8% and therefore worked out to $8000.
I would then be up for capital gains tax on only $2000, since i can write the interest off against the capital gain.Now instead of starting a dedicated loan account for the specific purpose of purchasing the investment shares, what if i used some of my home loan which i'd previously paid up. Assume i had paid in over a $100 000 on my mortgage of my private residence and that i then drew $100 000 from my home loan and then used this money specifically to purchase shares as in the above case. Assume – for the sake of simplicity – that my mortgage attracts 8% interest as well.
To my mind, this should be no different than the first case, and i should also be able to offset the R8 000 (extra) interest charged on my mortgage against any capital gain i may make by selling the shares in that tax year.Is this the case?
I need to know for sure.
I think you are asking can you claim the interest on a redraw from your existing home loan to which the answer is NO.
It is a lot cleaner and simpler to set up a totally new loan specifically for the purposes of investment so the interest can be easily identifyable.
If you still have a non deductible home loan there is nothing to stop you being creative with the offset account to reduce the interest being charged on the ND debt.
Richard Taylor | Australia's leading private lender
Interest deductibility is determined by what the loan amount is used for. If you used the redraw to borrow shares, interest would be deductible, but would be worked out as follows.
In your example, lets say your home loan balance was $250,000 after your redraw.
If you use that $100,000 to buy shares, the interest deduction on your home loan would be 40% (100 / 250) of the total interest for the year, or portion of the year.
Richard is correct in saying it would MUCH easier for you to get a new, separate loan for investing purposes.
hi Richard
Thanks for the reply.
I had always heard that the deciding factor on whether interest is tax deductable was the PURPOSE to which the money was put and not the SOURCE of the money, i.e. what type of loan account.
I'm guessing that loans for the express purpose of purchasing shares will attract far higher interest rates than what a mortgage would…
But if that's how it works, I'll have to work with the system, however stupid and wasteful it may be.
hi Dan
Thanks for the reply.
What you say makes sense. I guess the only disadvantage of the dedicated investment loan account would be the interest rate charged (i currently am on a variable mortgage rate of 5.04% – expected to drop soon if the RBA does the right thing next tuesday)
Or split your loan account
neilvs wrote:To all you financial/tax experts out there:I know that i can go to the bank and take out a loan specifically for the purposes of purchasing shares as an investment.
Say i borrow $100 000 through some type of bank loan.
Let's assume that in under 12 months (during a certain tax year) i have made $10 000 profit through the sale of these shares.
Let's assume furthermore that the interest on the loan was 8% and therefore worked out to $8000.
I would then be up for capital gains tax on only $2000, since i can write the interest off against the capital gain.
Is this the case?This would seem fair and logical but as an individual taxpayer
you cannot compare interest expenses against capital gain income.
You can only offset interest expense against dividends income.
Capital Loss can only be offset against future Capital Gain
see point 4 & 5 under if you are a straight forward investor
http://www.minettpartners.com.au/bulletin/i2006n.html#2http://www.ato.gov.au/individuals/content.asp?doc=/content/18851.htm
unless you are Centrelink
duckster wrote:neilvs wrote:To all you financial/tax experts out there:I know that i can go to the bank and take out a loan specifically for the purposes of purchasing shares as an investment.
Say i borrow $100 000 through some type of bank loan.
Let's assume that in under 12 months (during a certain tax year) i have made $10 000 profit through the sale of these shares.
Let's assume furthermore that the interest on the loan was 8% and therefore worked out to $8000.
I would then be up for capital gains tax on only $2000, since i can write the interest off against the capital gain.
Is this the case?This would seem fair and logical but as an individual taxpayer
you cannot compare interest expenses against capital gain income.
You can only offset interest expense against dividends income.
Capital Loss can only be offset against future Capital Gain
see point 4 & 5 under if you are a straight forward investor
http://www.minettpartners.com.au/bulletin/i2006n.html#2http://www.ato.gov.au/individuals/content.asp?doc=/content/18851.htm
unless you are Centrelink
hi Duckster
Thanks for the above very useful links! I had a look at these and my interpretation is that interest is deductable if there was a dividend payed or at least a reasonable expectation of a dividend to be payed on said shares.
I've asked my tax consultant about the allowability of interest deductions from a home loan and she has confirmed that this is indeed allowed, but that it would be better cost wise to split the loan and use one portion entirely for share purchase purposes. This isolation of the part of the loan used exclusively for share purposes will lower my accounting fee as it will simplify calculations of the allowable portion as opposed to the portion applicable to the home repayment/interest.
Thanks Dan42 and Scott No Mates – your comments seem to match what my tax consultant believes.
If course she may not understand all the facts pertaining to my situation as it was a quick and dirty email query, so I'm not saying she is correct – i just wanted to add this to the 'debate'…
Thanks to all of you who have made comments here (and elsewhere on the forum) – my education on investment is growing by the day thanks in part to all of you!
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