Tax deduction of interest on borrowings

[pugs]

Investment books comparing property and share investment often state that interest paid on borrowings used for purchase of shares is tax deductable - just as for rental property. However, I've never seen the principle carried through to any more comprehensive explanation.

My question applies to long term investment rather than trading. The objective would be to build a larger portfolio, for future dividend income, than could be achieved without borrowing. As with property, one could choose a range of approaches from loss making "negative gearing" through to more modest borrowings which could leave some taxable profit after deduction of interest from dividends.

Can anyone provide any practical guidance or comment on the requirements or processes involved in exercising this principle?

Thanks in advance .. Pugs

[duncan macgregor]

PUGS, YOU cant have it both ways. Pay tax then claim tax. Or dont pay tax and dont claim. macdunk

[stephen]

You can claim your tax on borrowings for shares if you are "long term" and not a trader, because the cost is incurred in achieving income from dividends. Of course, you will need to have some evidence to persuade the IRD that you are genuinely in pursuit of dividend income and not a trade, but you should have that anyway.

Macdunk is wrong.

(Note. I am not a lawyer or accountant).

[Steve]

Pugs, if you borrow money with the INTENTION of using it to derive income ie:in this example, dividends from a long-term held portfolio of shares, then that interest cost will be a deductable expense in your tax return.

Put another way, you are borrowing money to generate dividend income, therefore deductable

[Steve]

Look at that!...Steve & Stephen were writing the same thing at the same time! How about that?[]

[duncan macgregor]

I would have thought it was like buying a property to live in and not trade or rent out. Like steven i am not a lawyer or accountant and might well be wrong. macdunk

[zyreon]

interest is a cost neccessarily incurred in the course of business.

it is deductible.

[KJ]

Pugs
From IR3G-income tax return guide:Expenses Pg 43

"interest on money you borrowed to buy shares or to invest-as long as the investment will produce some income that is taxable"

So you can claim for LT holdings as dividends are taxable or for short term trades.

[KJ]

Pugs
Also look at thread "Some questions for Traders"-quite a lengthy debate on this subject.

[Steve]

For those interested on the deductability of interest, a useful source would be the CCH Master Tax Guide. Section 10-120 Principles of Deductability.

One of the defining Court Cases is none other than BRIERLEY, for which we must all be thankful for.