Thoughts on Margin Lending

[buxlo12]

Buxlo - Obvoiusly a loving relationship . Just make sure she doens't get involved in it or it will be tainted. I would have thought a trust was better but I assume you want to offset the losses (due to interest) against wages. How aobut setting up a trust as well and loaning the the start up funds for the LAQC from the company. That way the company has no assets should it become tainted.

It is a loving relationship but as it has moved a long quite quickly and I don't want to be stuck in a the Defacto boat with out a life raft .

How aobut setting up a trust as well and loaning the the start up funds for the LAQC from the company.

I am guessing you meant loaning the start up funds for the LAQC from the trust.

I have thought about setting up a trust to do just that. However setting up a trust would be another cost and may not provide me with to much more protection from tainting. As long as I don't add capital into the company after the defacto relationship start date or get her involved with it with either time or money it should be safe from tainting.

A trust would be tainted by adding/gifting funds into the trust after the defacto realtionship start date the same as a company.

[CJ]

I am thinking of creating a LAQC to hold a leveraged portfolio of listed property trusts and a exchange traded.

Did you go ahead with this? What are oyour thoughts on the proposed changes to the LAQC regime.

[peat]

Under relationship property all shares/property you owned before you were in a defacto relationship is still considered your property. For example if I sold some shares of Company A (that I bought before I was in a relationship) and then bought some other shares of Company B (I am now in a defacto relationship) the shares I own in company B would be considered relationship property.

The definition of relationship property is that which has a common use or benefit, so I would think that you're not correct here, as long as the partner derives no benefit from the shares i.e keep the income separate as well, then if they were in your name they could continue to be considered separate, as would any new ones you bought with money from the old shares or even from a separate bank account.
The house and chattels that you owned before which are now the family home obviously confer the partner a benefit and so too does the boat if she goes out fishing with you, but if the shares were yours and stay that way (that is they are not 'intermingled' with other relationship property) and dont confer any benefit on the partner then they remain outside the 'relationship property'. Thats what my estate planning and tax paper is teaching me (which is why I wouldnt have replied to this thread earlier). I'll let you know if I fail the paper ;+)

[peat]

In my "investor" accounts, I've never claimed the interest as an expense as this would expose my capital gains to tax. My "trading" account does however as I pay tax on this account.

I wanted to say that NZ Taxation 2010 volume clearly says under Eight Principles of Deductability "The CIR (Commisioner of Inland Revenue) will not deny an interest deduction simply because the taxpayer makes or intends to make a capital gain from the the asset acquired by the borrowed funds".
which of course doesnt actually allay your fears however in the regard of paying tax on capital gains, but I'm pretty sure theres no link between deductability and capital gain, so you're missing out on a deductible claim for no reason

There are a few factors as to whether your profits are considered capital gains or income but deducting the cost of interest isnt one of them. Its pretty much all about the intent at the time, and the amount of trading is a factor as well.

[Aaron]

I wanted to say that NZ Taxation 2010 volume clearly says under Eight Principles of Deductability "The CIR (Commisioner of Inland Revenue) will not deny an interest deduction simply because the taxpayer makes or intends to make a capital gain from the the asset acquired by the borrowed funds".
which of course doesnt actually allay your fears however in the regard of paying tax on capital gains, but I'm pretty sure theres no link between deductability and capital gain, so you're missing out on a deductible claim for no reason

There are a few factors as to whether your profits are considered capital gains or income but deducting the cost of interest isnt one of them. Its pretty much all about the intent at the time, and the amount of trading is a factor as well.

I would agree with Peat. The important issue is to have long term investments clearly separate from trading investments via separate companies or Trusts etc. The long term investments will still generate dividend income (much like residential property rental income) and the interest incurred on these would be a deductible expense. Claiming interest wouldn't necessarily cause your investments to be taxed but I guess there might be other issues in regard to your investments to consider.

[peat]

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

[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!!