Proceeds of CapGain - to Deductible or Non-D loan?

[Luke]

Sorry if this has been answered before - I can't find it tonight if it has...

If I borrow $x from an investment loan to buy shares
Lets say I sell 6 months later (to avoid 50%CGT discount issues) for $x+y

Clearly I've gained $y, which is declared and paid tax on.
But the critical question: Does $y need to be deposited to my investment loan? $x is the capital, no question there that it must.... but $y?

It strikes me as common sense that it should, for if $y is negative you certainly should... but is it in the tax law? If so, can you point to a provision?

Thanks, Luke

 

[alexlee]

If I borrow $x from an investment loan to buy shares
Lets say I sell 6 months later (to avoid 50%CGT discount issues) for $x+y

Why would you want to avoid the 50% discount?

 

[bluestorm]

If I borrow $x from an investment loan to buy shares
Lets say I sell 6 months later (to avoid 50%CGT discount issues) for $x+y

Yes, what 50%CGT discount issues are you talking about I would have though most people they and reduce the tax they pay.

But the critical question: Does $y need to be deposited to my investment loan? $x is the capital, no question there that it must.... but $y?

No, $y does not have to be put into the investment loan. Only $x does (unless you use the money again for another investment purpose).

Obviously if $y is negative, then you effectively cut into you capital $x . When $Y is positive is profit from the other investment. You still only used $x from the investment loan.

 

[Luke]

Thanks for your quick responses,
@alexlee... - That just wasn't relevant to the question. I'll legitimately avoid tax in reality, don't worry. I just wanted to clearly define the situation so we were talking about $y not if $y is half or not.

@bluestorm...
I find myself arguing with this, and agreeing with you too.
Picture this:
I have two loans: one deductible, one non-deductible.
Buy Share A for $100, sell for $150.
Buy Share B for $100, sell for $50.
Can I really now have $50 less deductible debt, $50 more deductible debt, and a CGT bill of $0?

That's when my internal bush-lawyer says the ATO is not so silly....
Thanks again...

 

[alexlee]

Picture this:
I have two loans: one deductible, one non-deductible.
Buy Share A for $100, sell for $150.
Buy Share B for $100, sell for $50.
Can I really now have $50 less deductible debt, $50 more deductible debt, and a CGT bill of $0?

My understanding (check with a tax expert, please), is that in scenario A you can repay the $100 share loan, and use the $50 profit (after taxes) for private purposes. Obviously you no longer have the deduction for the interest on the $100 loan. The complicating factor is how your loan was structured. If it's all one loan, then you may have to apportion the repayment between deductible and non-deductible. If it's a LOC, then you can, and have to (as you no longer have the asset) repay the deductible part first.

In scenario B, my understanding would be that, as you say, the 50 left on the share loan is no longer deductible because you don't have income on the other side. You don't have a CGT bill, but you have CG loss you can use elsewhere.

 

[Rob G.]

Thanks for your quick responses,
@alexlee... - That just wasn't relevant to the question. I'll legitimately avoid tax in reality, don't worry. I just wanted to clearly define the situation so we were talking about $y not if $y is half or not.

@bluestorm...
I find myself arguing with this, and agreeing with you too.
Picture this:
I have two loans: one deductible, one non-deductible.
Buy Share A for $100, sell for $150.
Buy Share B for $100, sell for $50.
Can I really now have $50 less deductible debt, $50 more deductible debt, and a CGT bill of $0?

That's when my internal bush-lawyer says the ATO is not so silly....
Thanks again...

TR 2000/2 deems a recoupment when sold.

Worse still if you use a LOC, the ATO regards this as a monthly refinance and the remaining deemed $50 may lose its deductibility as well depending on circumstances.

Cheers,

Rob