Leveraged share investments with tax benefits

[Jadedagain]

Hi all,

So as I understand it you can borrow to purchase shares with the intention of gaining a dividend.. fine.

For simplicity lets say you borrow 100k to invest in this manner with an interest rate of 6% (6k per annum). As an expense this is tax deductible at your marginal tax rate (say 33%).

So at tax time you will claim back 2k.

Brokerage costs are not claimable as an expense..fine.

Getting to my question, if you borrowed for the brokerage costs is the interest on that borrowing tax deductible?

Appreciate any other information you might be able to provide on this scenario. The IRD website lays out everything you can imagine for borrowing to buy rental properties but seems weak in this area. Also if you have any links to good information would be great.

Cheers

[Harvey Specter]

The brokerage forms part of the capital cost of the asset (shares) so the interest on the amount borrowed would be deductible.

[Jadedagain]

Great thanks, thats what I had expected.

If in the same scenario you ended up with a remainder of cash in your CMA from the borrowed amount, say $100 or something do you need pay this back against the loan or can you just leave it for future use?

[Harvey Specter]

Great thanks, thats what I had expected.

If in the same scenario you ended up with a remainder of cash in your CMA from the borrowed amount, say $100 or something do you need pay this back against the loan or can you just leave it for future use?YOu can leave it in the CMA. Technically you are earning income on the CMA, at a lower rate than you are being charged, so still meets the criteria, and would even if the CMA doesn't earn interest.

Just dont pull out the money to buy something for personal use, even if you repay it, as then it is mixed funds and you may have issues.

A margin account is another option where they give you an overdraft, therefore you only pay interest on the amount you borrow. The issue with this is it will be at a higher rate then you can get if you secure it over your home. I am currently paying 5.25% floating on my mortgage but 6.7% on my (small) margin account.

[Jadedagain]

Since you are turning out to be a wealth of knowledge I will try and make the most out of it... mostly what I understood but nice to have confirmation.

Am I correct that these rules don't apply to off shore investments (excluding those specified ASX all ords)?
So I could do the same thing owning BHP for example but I couldn't use those funds to purchase ASX listed Vanguard products, and then claim interest costs?

But if I purchased products like that with the same broking account with other funds, no issues?

[Harvey Specter]

I dont see why offshore investments would be an issue as you would still be acquiring to derive income, not capital gains ;)

There may be some interplay with the FIF rules however so you may be right.

[Jadedagain]

As FIF rules don't apply to sums under $50k this won't worry me for a while yet. At that point might be worth paying an accountant.

Interesting I will try and find some clarification around the foreign investment expenses.