Thoughts on Margin Lending

[shasta]

read this link to assist you going forward
http://www.ird.govt.nz/technical-tax...nsactions.html
you'll notice the judgement refers to two 'limbs' with sectional references , you may want to try and read those sections on the IRD web site under the Income Tax Act 2007

my text book NZ Taxation 2010 outlines three limbs that apply to transactions involving personal property which are not part of a business and where the asset is not trading stock where the realised gain will form part of the taxpayers income if it is caught by any of these limbs

1. Profit Making Undertaking or Scheme - an amount that a person derives from carrying on or carrying out an undertaking or scheme entered into or devised for the purpose of making a profit
2. Personal Property Acquired for Purpose of Disposal - - an amount that a person derives from disposing of personal property is income of the person if they acquired the property for the purpose of disposing of it
3. Business Dealing in Personal Property - an amount that a person derives from the disposing of personal property is income of the person if their business is to deal in property of that kind

So one needs to examine those and see if one would be caught by any those limbs

Some further notes.
It says limb 2 " does not apply to shares acquired with the intention of resale. It only applies to shares acquired with the purpose of resale.
So it is distinguishing between purpose and intention - something us non lawyers find a bit difficult. but later on the book says... "A definite intention to sell the property in the immediate future is not necessarily within the scope of the second limb because of of the distinction made in Plimmer v CIR 1958 when Barrowclough said 'purpose is usually, and more naturally, understood as the object which he has in view of selling withou having also an intention of selling, but, in ordinary language purpose connotes something added to intention and the two words are not usually synonymous'"


The Court acknowledges a number of reasons why a taxpayer would buy and sell shares without any regard to the tax consequence (which I take as meaning these are good reasons to buy and sell shares without being a trader or of incurring income tax)

• To maintain the portfolios overall balance
• To maintain the portfolios exposure in relation to particular sectors
• To sell whn brokers issue a not of caution or warning
• To sell when there has been a change in management
• To sell when there has been a management buyout
• To sell when there has been a take over offer
• To buy shares when they are clearly undervalued
• To sell share when market sentiment has over valued them in terms of the fundamentals of the company.

Bottom line though , your interest costs are deductible and especially so for non trading shares as the whole issue of dedcuctability centres around the expense being related to the production of taxable income in the form of dividends.

Hope this helps others in their decision making process of share profits being taxable income

Just to simplify it further (ie from the IRD's perspective), there needs to be some nexus between the expenses incurred & your income.

The IRD will NOT allow deductions where there is no income, nor any chance of any - which is common sense really, there is no way the IRD will allow a system that does not favour them, ie allowing deductions & tax refunds where there is no income, you can still make losses so long as there is some form of income

[RRR]

Used up my revolving credit to the limit(almost) to buy shares. I think i am going to use margin lending (30-50%-i don't want to risk too much) with asb sec. Current rate is 6.45%(will only go up as the OCR increases). Feeling a bit nervous since i feel in uncharted territory. Wife is reluctant but managed to convince her. I will be claiming interest costs though.

[percy]

Used up my revolving credit to the limit(almost) to buy shares. I think i am going to use margin lending (30-50%-i don't want to risk too much) with asb sec. Current rate is 6.45%(will only go up as the OCR increases). Feeling a bit nervous since i feel in uncharted territory. Wife is reluctant but managed to convince her. I will be claiming interest costs though.

there are 2 competitions running on Sharetrader;1 on NZ market,the other on Aussie.Check them out.I think you will see approx 80 or 90% of entries have lost money.With margin the loses will be alot higher.Most posters have been following the sharemarket for a good number of years.It is very difficult to pick winners when the market is dropping.There are 3 rules to buying shares.
Rule 1 donot loose money, rule 2 donnot loose money, rule 3 read rule 1 and 2. So be careful.

[RRR]

Thanks for the good advice Percy. I did look at the competition and most of the portfolios are speculative!! I am a newbie still and don't have the experience which many of the posters in this forum have. My aim was to purchase shares on margin and pay it off in full from my income within 6-12 months-i can easily do that if i am borrowing only 10-20K. I would buy only stocks with good and reasonably stable dividend yield.

May be i should wait!!

[percy]

Thanks for the good advice Percy. I did look at the competition and most of the portfolios are speculative!! I am a newbie still and don't have the experience which many of the posters in this forum have. My aim was to purchase shares on margin and pay it off in full from my income within 6-12 months-i can easily do that if i am borrowing only 10-20K. I would buy only stocks with good and reasonably stable dividend yield.

May be i should wait!!

No.Just take your time,involve your wife , and buy 1 share every couple of months.Buy say $2,000 worth.That way you are doing it out of earnings.Each share you buy ,buy it with the view you are going to hold it for 10years or more.You choose 1 and next one is your wife's choice.both of you have to write down what the company does,will it pay you a dividend and where you see the company going and your reason for buying it.keep a note book and you can refer to it later to see if the reasons still hold true.Sometimes you buy a good share,you are right but the price goes down and if you have it on margin you have to sell.Owning it outright gives you finnancial independence which I think it is all about.Should you find you have 4 out of 5 right in a year's time,then you could look at margin.
l

[RRR]

After much thought, decided against using margin. Already has enough leverage using revolving credit home loan. I will stick to regular investing and have been doing that ever since i started investing. I think I was becoming greedy!! Not good. Thanks once again Percy.

[buns]

Pretty sure I posted a similar thread to this a while back, when I was fresh to the whole idea of lending to invest.

Looking back, I'm stoked I never touched it. I thought it was the perfect time, interest rates were low and it seemed the recovery was in full swing. Well we still haven't 'swung', I would have been hit with margin calls and pretty much every share I was thinking about.

I think it's just a patience thing. To eager to get in and get off to a quick start, thinking you don't have enough $$ to compound up into some nice sums.

I'm learning every day, but the big thing I've got better with over the last year is patience. If you can't be patient enough, and just work on building up your own capital, I think the chances of you being patient on any shareholdings is minimal.

Bruce covers both of these topics in his latest entry - http://www.stuff.co.nz/business/blog...-concentration

The guy knows a whole lot more than me, but if you are new to his blogs, read them with care. He's a smart chap, however conjures up some Farley bizarre ideas. I personally think the guy is a knob end, some of his questions he comes up with at AGM's are totally pointless, but he turns them into big deals and then asks other shareholders to follow them, and raise there voice. He seems to go out of his way to be negative towards everything. Will leave it there..

[h2so4]

Pretty sure I posted a similar thread to this a while back, when I was fresh to the whole idea of lending to invest.

Looking back, I'm stoked I never touched it. I thought it was the perfect time, interest rates were low and it seemed the recovery was in full swing. Well we still haven't 'swung', I would have been hit with margin calls and pretty much every share I was thinking about.

I think it's just a patience thing. To eager to get in and get off to a quick start, thinking you don't have enough $$ to compound up into some nice sums.

I'm learning every day, but the big thing I've got better with over the last year is patience. If you can't be patient enough, and just work on building up your own capital, I think the chances of you being patient on any shareholdings is minimal.

Bruce covers both of these topics in his latest entry - http://www.stuff.co.nz/business/blog...-concentration

The guy knows a whole lot more than me, but if you are new to his blogs, read them with care. He's a smart chap, however conjures up some Farley bizarre ideas. I personally think the guy is a knob end, some of his questions he comes up with at AGM's are totally pointless, but he turns them into big deals and then asks other shareholders to follow them, and raise there voice. He seems to go out of his way to be negative towards everything. Will leave it there..

Well it's all a reason why you would only purchase when you had a margin of safety but that is a Graham concept that probably goes beyond Bruce.

[percy]

Pretty sure I posted a similar thread to this a while back, when I was fresh to the whole idea of lending to invest.

Looking back, I'm stoked I never touched it. I thought it was the perfect time, interest rates were low and it seemed the recovery was in full swing. Well we still haven't 'swung', I would have been hit with margin calls and pretty much every share I was thinking about.

I think it's just a patience thing. To eager to get in and get off to a quick start, thinking you don't have enough $$ to compound up into some nice sums.

I'm learning every day, but the big thing I've got better with over the last year is patience. If you can't be patient enough, and just work on building up your own capital, I think the chances of you being patient on any shareholdings is minimal.

Bruce covers both of these topics in his latest entry - http://www.stuff.co.nz/business/blog...-concentration

The guy knows a whole lot more than me, but if you are new to his blogs, read them with care. He's a smart chap, however conjures up some Farley bizarre ideas. I personally think the guy is a knob end, some of his questions he comes up with at AGM's are totally pointless, but he turns them into big deals and then asks other shareholders to follow them, and raise there voice. He seems to go out of his way to be negative towards everything. Will leave it there..

Buns,great post.I think we all react to the pressure of debt differently.To some it is great motivation,to others it leads to depression.A few years ago Postie Plus appointed Ron Boswell as chief executive,replacing consevative accountant trouble shooter Paul Young.Young is a dow man.Boswell had a good retail CV working in Aussie.Man can he talk the talk.I read what he said and thought this company is in a strong finnacial position and Boswell will achieve great things.I was not alone thinking this,and noted Salvus Investments brought a large parcel at this time.I brought 49.000 shares at just over $1 and had considered the investment was so compelling I considered buying 200,000 on margin.As I have no borrowings it was only stubborn pride that stopped me going a asking for a loan.Well the long and short of it was Boswell could not walk on water,{in fact he had trouble passing water}and I sold out at 90 odd cents loosing $10,000.
I hate to think what I would have lost on margin.I noted Salvus also sold out.Postie Plus shares are about 33cents now.The other time I looked at margin I had 10,000 PGC shares worth approx $4 at the time. At the AGM the chairman spoke very positively,so I rang Marac{owned by PGC]and asked to borrow enough to buy an other 10,000 shares using my shares and the extra ones as security.No way they would not do it.Yes PGC shares did double.