refinance to buy shares.. tax deduction?

[donkey]

I read this on an australian newspaper:

I have a $185,000 mortgage on an investment property worth $350,000, which is breaking even and not providing any negative gearing benefit. I am thinking of refinancing the loan and borrowing an extra $100,000. I would then invest $50,000 in shares and contribute $50,000 to my super. Would I be able to claim this as an investment cost and regain the negative gearing benefit for the property, given I am using the funds for investment purposes, although not for property investment?


You can claim the interest on that portion of the loan that is used to buy income-producing shares, but no deduction is allowed for interest on money borrowed to invest in superannuation.


Read more: http://www.smh.com.au/money/plannin...e-to-travel-20140225-33dk7.html#ixzz2uccCRkfc

Is this correct? Can I borrow more money against my I.P and then claim as a tax deduction?

Is there anything else I can buy where I can claim a tax deduction (apart from shares and another I.P)?

thanks

 

[Terry_w]

I read this on an australian newspaper:

I have a $185,000 mortgage on an investment property worth $350,000, which is breaking even and not providing any negative gearing benefit. I am thinking of refinancing the loan and borrowing an extra $100,000. I would then invest $50,000 in shares and contribute $50,000 to my super. Would I be able to claim this as an investment cost and regain the negative gearing benefit for the property, given I am using the funds for investment purposes, although not for property investment?


You can claim the interest on that portion of the loan that is used to buy income-producing shares, but no deduction is allowed for interest on money borrowed to invest in superannuation.


Read more: http://www.smh.com.au/money/plannin...e-to-travel-20140225-33dk7.html#ixzz2uccCRkfc

Is this correct? Can I borrow more money against my I.P and then claim as a tax deduction?

Is there anything else I can buy where I can claim a tax deduction (apart from shares and another I.P)?

thanks

yes..........

 

[Simon]

You can borrow against any security you like to invest in shares or any taxable income producing endeavour.

If you borrow against your home make sure the new loan is on a separate statement to the original mortgage. A split loan or LOC will do the trick.

Nothing magic here.

 

[Ed Barton]

Make donations to registered charities. Very good deductions. It's all about reducing your tax.

 

[datto]

How about starting your own religion to gain tax benefits! Or charitable organisation!

 

[The Y-man]

You can borrow against any security you like to invest in shares or any taxable income producing endeavour.

Important bit there as I understand - the shares must pay dividends (or intend to).

The Y-man

 

[Paul@PFI]

Yes !!! Shares which are acquired for purpose of resale for a profit are NOT eligible for interest deductions. Example ?? Buying shares in a company which hasnt paid a dividend in past may be a speculative buy for purposes of securing a capital gain. In such a case the loan interest forms part of the cost base. (ie the interest deduction is deferred to reduce the taxable profit).

In advice to clients I like to use a comparison;
1. Land which is undeveloped
2. Land with a home
The land cant generate revenue unless it is sold. It cant be "rented". ATO dont consider agistment as a income producing activity. Excepting it being trading stock by a land developer its likely ONLY to generate capital gains. The interest is an element of the cGT costbase.
However a house and land can be rented and earn rental income. Hence while its available for rent the interest is deductible. When its sold a capital gain.

 

[speary]

ATO dont consider agistment as a income producing activity.

In the business schedule for individuals where you are required to input and industry code (Label P2 A) some of the options include code 01410 Agistment service (sheep) and 01420 Agistment service (cattle). Also included are agistment for horse and goat.

Therefore, I would suggest that the ATO do consider agistment to be an income producing activity.

I would also suggest that if you lease out your vacant land for storage of trucks, cars etc then so long as you declare your income you should be able to claim an interest deduction for this as well.

 

[Ed Barton]

Yes !!! Shares which are acquired for purpose of resale for a profit are NOT eligible for interest deductions. Example ?? Buying shares in a company which hasnt paid a dividend in past may be a speculative buy for purposes of securing a capital gain. In such a case the loan interest forms part of the cost base. (ie the interest deduction is deferred to reduce the taxable profit).

What about shares that haven't paid a dividend in a while but might/hope to in the future? I'm thinking some airlines for example. Is there some time threshold? You can only flog a dead kangaroo for so long. lol.

 

[Rob G.]

What about shares that haven't paid a dividend in a while but might/hope to in the future? I'm thinking some airlines for example. Is there some time threshold? You can only flog a dead kangaroo for so long. lol.

Don't get too worried.

s. 57AAA ITAA36 is only likely apply where the constitution does not permit distributions except for returns of capital.

e.g. there are unit trusts that do not distribute net income and the only way to make any profit is to sell or require the trustee to redeem.

However, if you buy cheap shares in a distressed company unlikely to pay a dividend in the hope of making a gain on winding up then that may be questionable. However, liquidator's distributions are still assessable where they represent underlying regular retained profits.

Highly unusual.

EDIT: Typo in text. Should be s. 51AAA ITAA36

 

[Ed Barton]

Don't get too worried.

s. 57AAA ITAA36 is only likely apply where the constitution does not permit distributions except for returns of capital.

e.g. there are unit trusts that do not distribute net income and the only way to make any profit is to sell or require the trustee to redeem.

However, if you buy cheap shares in a distressed company unlikely to pay a dividend in the hope of making a gain on winding up then that may be questionable. However, liquidator's distributions are still assessable where they represent underlying regular retained profits.

Highly unusual.

Thanks. I'm not worried, I don't have any debt. I was just inquisitive

 

[donkey]

thanks for all the replies.

can I just clarify something...

As long as I purchase shares that give dividends then its a 100% tax deduction.

my question is... once the money is funded can I simply buy them through my cba netbank trading account?

Im assuming that I dont have to apply for a 'margin loan' from commsec or any other types of lending facilities for shares?

I just want to apply for a top up loan on my I.P and when the money is funded (to a LOC or whatever) then buy the shares using that money and then get the tax benefit. Is this how it works?

thanks

 

[D.T.]

thanks for all the replies.

can I just clarify something...

As long as I purchase shares that give dividends then its a 100% tax deduction.

my question is... once the money is funded can I simply buy them through my cba netbank trading account?

Im assuming that I dont have to apply for a 'margin loan' from commsec or any other types of lending facilities for shares?

I just want to apply for a top up loan on my I.P and when the money is funded (to a LOC or whatever) then buy the shares using that money and then get the tax benefit. Is this how it works?

thanks

Yes definitely tax deductible interest.
Yes can buy thru netbank
Yes a margin loan isnt necessary, however leveraging for returns is nice eg 100k from equity to buy shares then 50k more shares on top with ML. As long as you know what you're doing.

 

[Propagate]

Interesting.

I have two IO loan splits against my PPOR.

Ball parking:-

Loan 1 - $350k debt o/o $350k facility (100% offset to cash/savings account)
Loan 2 - $25k debt o/o $35k faculty

Neither split is tax deductible as the purpose of both loans is for the PPOR.

Assuming 5% interest rate, if I were to go and buy $5k in shares from my savings account, my cash savings reduce by $5k so technically my loan 1 split costs me more each month due to less in the offset, (5% of $5k = $20.83 per month extra interest payment on Loan 1).

If I were to split the 2nd loan into two loans of $30k and $5k and drawn the $5k for shares then I now have a new monthly loan to pay of $20.83 but my $5k cash is preserved in the offset, (so no change to the offset loan payment), and I can now claim 37% of the new $5k loan payment on my returns each year as I bought dividend producing shares? ($7.70 per month rebate).

Doesn't sound like a lot, but if you are a regular share investor I can see how it makes sense as a bad debt/good debt reduction tool and the rebate is essentially free money.

Hypothetically, if you had $100k cash in the bank that you were going to buy shares with, can you "wash" that $100k by paying it off your mortgage, then borrow it back as a $100k split against the house but the purpose being for shares? Are the ATO ok with that?

Cheers.

 

[Aaron_C]

Hypothetically, if you had $100k cash in the bank that you were going to buy shares with, can you "wash" that $100k by paying it off your mortgage, then borrow it back as a $100k split against the house but the purpose being for shares? Are the ATO ok with that?

Cheers.

I don't see that being a problem if the 100k cash is tax-paid money already.

 

[Ruckmauler]

Great reading! I find myself in a similar situation. I have just bought a new home and am trying to figure out what to do with my current unit where I've lived for 10+ years. It's fully paid off so I had assumed I would just sell (and offset the home loan) as if I turned into an I.P I am up for 37% tax on the rental income.

So ideally I would refinance, then be looking for some nice safe income (maybe even bonds/hybrids). So the basic idea is rental income plus investment income minus costs and what's left taxed at my marginal rate. Then i get to keep my asset. Sounds like a plan I need to investigate more.

 

[Terry_w]

Great reading! I find myself in a similar situation. I have just bought a new home and am trying to figure out what to do with my current unit where I've lived for 10+ years. It's fully paid off so I had assumed I would just sell (and offset the home loan) as if I turned into an I.P I am up for 37% tax on the rental income.

So ideally I would refinance, then be looking for some nice safe income (maybe even bonds/hybrids). So the basic idea is rental income plus investment income minus costs and what's left taxed at my marginal rate. Then i get to keep my asset. Sounds like a plan I need to investigate more.

If you don't have a loan then you cannot refinance. What you could do is to borrow to buy an income producing asset. This may help you get wealthy but doesn't really assist your tax position because you will be paying interest, but getting an income as well.

 

[Ruckmauler]

If you don't have a loan then you cannot refinance. What you could do is to borrow to buy an income producing asset. This may help you get wealthy but doesn't really assist your tax position because you will be paying interest, but getting an income as well.

Thanks Terry - yes I meant borrow against the property. The hope/plan would be to earn more from the investments and rent after tax than the interest paid. On that thought - if I am renting the property - but have borrowed only to buy shares - can I still deduct things like strata levies?

 

[Terry_w]

Thanks Terry - yes I meant borrow against the property. The hope/plan would be to earn more from the investments and rent after tax than the interest paid. On that thought - if I am renting the property - but have borrowed only to buy shares - can I still deduct things like strata levies?

If you are renting the property you would be getting an income from it so any expense associated with producing that income would generally be deductible - if renting at market rates.