Purpose of loan after selling asset ?


Hi in this thread Lily House talked about buying shares with an equity loan.

Originally posted by Lily House
For example, I have borrowed the increased equity on a rental property to buy shares. The whole loan is tax deductable as I used the money to invest. However, I think the tax department would be umimpressed if I then sold these shares to, say, take an overseas holiday. In this case the original (share) loan is no longer for an investment.

... now is this really the case ? If you buy the shares with an equity loan, we know the interest on the loan is deductible.

But if you sell some of the shares (as you do if you were trading for example) - the purpose of the loan hasn't changed (fully) - the loan interest is still deductible right ?

But if you sell your entire portfolio of shares does this change the nature of the loan ? Surely you can sell all of the original share portfolio and buy more shares - I can't see a problem with that. But what about selling the shares without re-investing them. Does the loan interest lose its deductibility ?

While it doesn't directly address your post, it may be worth making the general point(for those that aren't already aware) that how tax is accessed for Share Owners depends on whether you are classified as a 'Trader' or 'Investor'. For example, items such as brokerage may or may not be directly claimable depending on how you are classified.

Tony Crompton has an excellent Second Edition book out called "Shares, Derivatives and Taxation-A Guide for Investors, Traders and Speculators'. Just for those of you who are having trouble getting to sleep at night........;)

Sorry, back to your post.......be interested to hear the responses too......


I don't think there is a simple answer to this question that will work in every situation. The tax office, on review, might be inclined to say no claim, but, the courts if appealed might allow the claim to go ahead.

A lot would depend upon the individual facts involved; and, the type of loan used.

There have been court cases over the last few years where the bottom line is does the person have a chance to repay the loan? Being a LOC the answer is yes.

Another thought is that when the cheque comes from the stock broker it will be abnked into an account. At that point, the original transaction is finished, and, a new one is created when the funds are withdrawn to use in a different way.

My thoughts are that the loan interest will cease to be tax deductible, but, I'm also keen to see if there is a way to make that trabsaction deductible.

Finally, it will depend too whether the loan is taken out by an individual, or, by a trustee as this might make a difference as well.

Have fun

Along with Tony Comptons' book I would also recommend "Taxation Pocket Guide for Australian Share Investors" by Jimmy B. Prince published by McGraw-Hill. An excellent reference and he also has one out now for Property Investors.