Tax treatment on margin loans

[bellenuit]

For some if not all margin accounts, Interactive Brokers in particular and I think CommSec, proceeds of share sales are paid into the margin account and not to a separate account. I can see a potential problem with this from a tax point of view.

Margin interest is tax deductible ONLY if it is used to purchase income producing assets.

So lets say I buy $10K of shares in company A and $10K of shares in company B using a $20K margin loan (forget about LVRs etc., this question doesn't relate to them). The interest on my margin loan is tax deductible in full. Lets say that the price of company B's shares double and I want to cash them out and withdraw the $10K profit. I still want to own my A shares on margin. I sell all my shares in B, realising $20K. This reduces my margin loan to zero. I then withdraw $10K from the margin account, which is the profit made on B. I still hold shares in A.

As I understand the tax system, the $10K owing on my margin account is no longer tax deductible as I withdrew that $10K for personal needs not investment purposes. This problem arises as the sale proceeds were paid directly to my margin account, effectively paying off the loan in its entirety. If it had been paid to a separate account, one would simply have transferred $10K to the margin account to pay off the amount owing on B, but the amount owing on A is left untouched.

Is my understanding on this correct? I can't see how you can quarantine the proceeds of the sales of some shares from the amount owing on all shares collectively, so that one can maintain in full the tax-deductible of the interest on the amount "owed" on those other shares.

 

[Tysonboss1]

For some if not all margin accounts, Interactive Brokers in particular and I think CommSec, proceeds of share sales are paid into the margin account and not to a separate account. I can see a potential problem with this from a tax point of view.

Margin interest is tax deductible ONLY if it is used to purchase income producing assets.

So lets say I buy $10K of shares in company A and $10K of shares in company B using a $20K margin loan (forget about LVRs etc., this question doesn't relate to them). The interest on my margin loan is tax deductible in full. Lets say that the price of company B's shares double and I want to cash them out and withdraw the $10K profit. I still want to own my A shares on margin. I sell all my shares in B, realising $20K. This reduces my margin loan to zero. I then withdraw $10K from the margin account, which is the profit made on B. I still hold shares in A.

As I understand the tax system, the $10K owing on my margin account is no longer tax deductible as I withdrew that $10K for personal needs not investment purposes. This problem arises as the sale proceeds were paid directly to my margin account, effectively paying off the loan in its entirety. If it had been paid to a separate account, one would simply have transferred $10K to the margin account to pay off the amount owing on B, but the amount owing on A is left untouched.

Is my understanding on this correct? I can't see how you can quarantine the proceeds of the sales of some shares from the amount owing on all shares collectively, so that one can maintain in full the tax-deductible of the interest on the amount "owed" on those other shares.

Just do it, And keep the records of all the transactions involved along with a note explaining your intentions and I can't see there being a problem. as long as every thing else is above board and they can't see any evidence that you are going out of your way to withhold tax they are not going to hang you.

 

[Tysonboss1]

On second thought, what if you withdrew the funds on the same day, that way you could play it like you used the $10,000 sale to repay your personal loan.

 

[bellenuit]

On second thought, what if you withdrew the funds on the same day, that way you could play it like you used the $10,000 sale to repay your personal loan.

That's one potential option. If I withdrew the equivalent of the profit on B ($10K) between the sale and the settlement then that would increase my margin loan to $30K, of which only $20K is tax deductible. When the $20K proceeds come through, I deem $10K to pay off the non-taxdeductible part and $10K against the margin outstanding on B. That still leaves $10K fully tax deductible against A.

Although that would work, it becomes a bit messy when there are a lot of transactions, particularly as IB charge a $10 withdrawal fee for the 2nd and subsequent withdrawals. What makes IB more complex is that they are not in the Chess system, so dividends also get paid directly to your margin account.

I suppose one could always manually keep two separate balances, "Tax-deductible margin" and "unredeemed profit/dividends" (the broker will show only one balance - which is the margin balance, the sum of these two). So when the $20K proceeds comes through, the broker will show $0 margin balance, but my manual records will show $10K "Tax-deductible margin" and $10K "unredeemed profit/dividends". I can then manually draw against the latter once per month.

As you say, hopefully the ATO will be OK with that so long as my records are accurate and there is no intention to avoid tax.