Margin lending vs. traditional loan

[RichKid]

Re: Margin lending vs traditional loan

Ah yes, definitely! Well worth remembering ...

- Snaggle.

Glad you understand Snaggle. btw, the post wasn't directed at you but at first time and inexperienced investors and traders generally. Looking forward to your posts, certainly more succinct and productive than mine! Have to say I've gathered a lot from your comments already.

 

[chewy]

Re: Margin lending vs traditional loan

If you have a house/mortgage I personally think it is better to set up an equity line of credit. Has all the advantages of a margin loan and none of the negatives - i.e. only required to pay back the interest, can move cash in and out as much as you want, you aren't restricted to only the listed margin loan approved stocks, you wont get a margin call forcing you to sell at the worst time (i.e. when the SP is low).

Some people mistakenly think that they don't want to risk their house so take a margin loan - but if you fail to make repayments on a margin loan the bank can still sell your house (or any of your assets) in just the same way!

 

[awg]

Re: Margin lending vs traditional loan

Does an equity line of credit against your property enjoy the same full tax deductibility as a margin loan?

As a for instance, if you have a 100k line of credit, and use 50k to fund a share portfolio and 50k to fund renovations, is it a simple matter of quarrantining your interest costs for tax deduction purposes?

 

[DionM]

Re: Margin lending vs traditional loan

Does an equity line of credit against your property enjoy the same full tax deductibility as a margin loan?

As a for instance, if you have a 100k line of credit, and use 50k to fund a share portfolio and 50k to fund renovations, is it a simple matter of quarrantining your interest costs for tax deduction purposes?

I have two line of credit loans - one for house renos, one for investments only. Makes the calculations easy.

 

[chewy]

Re: Margin lending vs traditional loan

awg - technically it is possible but your accountant will hate you and may even refuse to do it because of the difficulty tracking different expenses and interest etc. As Dion says it is much easier to get the bank to set up a dedicated investment account to make the tax deductions calculations easy as pie.

 

[Snagglepuss]

Re: Margin lending vs traditional loan

Does an equity line of credit against your property enjoy the same full tax deductibility as a margin loan?

As a for instance, if you have a 100k line of credit, and use 50k to fund a share portfolio and 50k to fund renovations, is it a simple matter of quarrantining your interest costs for tax deduction purposes?

Tax deductibility depends only on the PURPOSE of the loan, not on what you are using as collateral for the loan. So yes, a line of credit has the same status as a margin loan, in that sense.

And yes, you need to "quarantine" your interest costs depending on purpose. It is much easier and infinitely preferable to maintain separate loans for separate purposes, just in case there is any doubt about tax deductibility. A "mixed use" loan can very quickly become unmanageable.

There are some subtleties to this in relation to margin loans. Many people decide that, having made some profits in their margin account, they will take out some of these profits to buy a new TV or car or whatever. But it may not be so simple. Normally, as soon as you sell a stock in your margin account, the proceeds of that sale are applied against the loan, reducing your outstanding loan balance. If you then decide to "take out" the profits, your outstanding loan amount will then *increase* by the amount you have taken out. In other words, you are actually increasing the loan in order to buy consumer goods. This means that the portion of the interest that applies to the amount you have taken out, *is no longer tax-deductible*! Your investment loan has suddenly become a "mixed use" loan, and calculating how much of your interest is deductible has suddenly become extremely complicated.

- Snaggle.

Disclaimer: I am not an accountant nor a tax expert nor a financial planner. I may be wrong (and often am). Please consult a professional for detailed advice.

 

[awg]

Re: Margin lending vs traditional loan

thanks for the replies about line of credit tax deductibility.

I sort of use it as a defacto margin loan, so I can stay fully invested.
Its main purpose is to fund renovations, holidays etc

However it sits mainly idle

The problem with establishing an extra credit line is that the banks charge an establishment fee + stamp duty.

I will consult with my accountant, as I am thinking of using it for several purpopses,(business establishment costs) some tax deductible....so long as I keep accurate records, I am hoping I can claim some tax deductions on interest.

regards tony

 

[DionM]

Re: Margin lending vs traditional loan

The problem with establishing an extra credit line is that the banks charge an establishment fee + stamp duty.

You should be able to get it for nil establishment fee, if not, change banks. I didn't pay when I got one setup with CBA. Stamp duty, well ... that's pretty much unavoidable when you want extra money, and isn't based on how many loans you have anyway, just the amount.

I will consult with my accountant, as I am thinking of using it for several purpopses,(business establishment costs) some tax deductible....so long as I keep accurate records, I am hoping I can claim some tax deductions on interest.

The keeping accurate records will be a pain. Just MHO but I'd go for a separate account, makes life much easier. If you're with CBA and want to find out to save on a/c fees and establishment fees, have a look at their website for the "wealth package". Basically once you get to a certain amount of loans with them, all fees are waived and you just pay a single $300 or so annual fee. Add up $8/mo a/c fees, establishment fees, c/card fees and you can save a few bucks ...

 

[Rod_WA]

Re: Margin lending vs traditional loan

Be very careful with mixed use loans!
The ATO has ruled a few times with regards to mixed loans, in particular split loans, saying that there is no way to pay down non-deductible parts of the loan in preference to deductible parts. It is even more hairy if you plan to use a single standard LOC and move funds in and out for both private and investment use.

Get a separate, interest-only, LOC for investment purposes, before embarking on purchasing shares or funds!

In another matter, deductibility of a ML and LOC are based on the same premise, that is that the investment is "income-generating".

The ATO tends to allow deductibility of investments in HighlySpec.com, on the basis that there is a reasonable likelihood of future income (not purely future capital gains!). So it is prudent to maintain a dividend-paying foundation of blue chip shares for your portfolio (but this is just a good idea anyway!).

I have not seen it tested, but for example, an investment in AMP Capital's China Growth Fund (AGF on the ASX) may not be deductible, since the fund's summary states: "The objectives do not include the payment of regular income to investors." This clearly (IMHO) violates the ATO's requirement for income for tax deductibility.

Just some cautions, not advice.