Selling geared shares and repaying deductible debt

[Nougati]

I have an interesting question I cannot find the answer to, I have rung the ATO, but even they did not seem comvinced with their own answer...so here goes...

Assume I bought $100,000 worth of shares with a $100,000 line of credit investment loan.The shares subsequently went up to $200,000 and I now want to sell 50% of my holding, so $100,000 worth of shares.

Do I need to proportionately repay the investment loan, i.e. 50% of $100,000 ($50,000) to retain the deductibility of the entire loan?

I would assume I would, but the ATO surprisingly says you do not have to, as long as the value of the remaining share portfolio is still higher than the original loan (i.e. $100,000)...

Any advice is appreciated!!

Nougati

 

[Rob G.]

According to TR 2000/2, only 50% remains deductible - if you use those proceeds for a PRIVATE purpose.

Cheers,

Rob

 

[Nougati]

Thanks Rob, that's how I previously read this as well...but then other people I spoke to seemed to be of a different opinion, and when the ATO people also contradicted their own tax ruling I was even more confused

...although, the ATO officers have been known to give incorrect advice or interpretations of the tax law

anyone else have an opinion or any experience with this?

 

[Programmer]

Assume I bought $100,000 worth of shares with a $100,000 line of credit investment loan.The shares subsequently went up to $200,000 and I now want to sell 50% of my holding, so $100,000 worth of shares.

As Rob.

You will sell half the shares (the asset). The emphasis is on the asset. You cannot claim loan interest for something you no longer hold.

Cheers,

 

[Gerberafly]

Where's the capital?

You are withdrawing (cashing out/realising/liquidating) part of your original invested capital (50%) and the gains and losses that you have made on that capital.

You get to decide which of the original capital withdrawn comprises the 50% (e.g. FIFO, LIFO, particular assets or unit trusts).

Tax deductibility is for interest that you pay on capital borrowed to use for income producing purposes. So you need to identify which of your capital that remains invested originated from borrowed funds.


I am not licenced to provide financial advice.