Tricky CGT question - can anybody crack this?

[luap77]

I have a tricky CGT question. All answers taken as discussion and not considered tax advice by me. My question is:

For non-dividend paying stocks (e.g. some speculative stocks) for which a loan was taken out to purchase them, were can the loan interest be taken into consideration when making a capital loss? When making a capital gain, the loan interest is added to the cost base, but when making a capital loss the reduced cost base is used, and loan interest cannot be included in the reduced cost as the third element no longer allows it (per private ruling 70225). Does this mean that loan interest on non-dividend paying stocks is only claimable if you make a capital gain (i.e by including it in the cost base), or can the interest still be claimed some other way in the event of making a capital loss? I'm not sure how, because for it to be claimable as a D7 or D8 deduction the stock would still have to be income producing...right??? Totally confused, as I'm sure others here are too, so replies to this tricky question are greatly appreciated. Thanks.

 

[JimBob]

Im not sure if i did my tax correctly or not, but i did get my refund back recently. I have an investment loan used to buy shares, i deducted the interest on the loan under D16 - debt deductions incurred in earning assessable income.

A 'debt deduction' is, broadly, an expense incurred in obtaining or maintaining a loan or other form of debt finance. Examples include interest, establishment fees, legal costs for preparing loan documents and fees charged by lending institutions for drawing on a loan facility.

 

[So_Cynical]

I have a tricky CGT question. All answers taken as discussion and not considered tax advice by me. My question is:

For non-dividend paying stocks (e.g. some speculative stocks) for which a loan was taken out to purchase them, were can the loan interest be taken into consideration when making a capital loss? When making a capital gain, the loan interest is added to the cost base, but when making a capital loss the reduced cost base is used, and loan interest cannot be included in the reduced cost as the third element no longer allows it (per private ruling 70225). Does this mean that loan interest on non-dividend paying stocks is only claimable if you make a capital gain (i.e by including it in the cost base), or can the interest still be claimed some other way in the event of making a capital loss? I'm not sure how, because for it to be claimable as a D7 or D8 deduction the stock would still have to be income producing...right??? Totally confused, as I'm sure others here are too, so replies to this tricky question are greatly appreciated. Thanks.

Why did you get a private ruling :dunno: you made something that was straight forward and easy, much more difficult.

The ATO publication 'Personal investors guide to capital gains tax 2010' states the following on page 12

STEP 2 Work out the cost base of your asset.

The cost base of your asset is the total of: the costs of owning the asset, such as interest on monies borrowed to acquire the asset (generally, this
will not apply to shares or units because you will usually have claimed or be entitled to claim these costs as tax
deductions)

http://www.ato.gov.au/content/downloads/IND00237980n41520610.pdf

 

[skc]

Since when was interest deducted form the cost base? Can you not just claim the interest expense every year, regardless of whether you sold the shares or not. I didn't think deductibility was dependant upon whether you made money (via dividend or capital gains) or not.

What if I borrowed $100K to buy 20 stocks and sold 10 of them, how do I allocate the cost base?

Some people like to reduce their current year tax bill by prepaying next year's interest. Surely that is only do-able when it doesn't involve having to sell your share and adjust the cost base.

 

[son of baglimit]

I have a tricky CGT question. All answers taken as discussion and not considered tax advice by me. My question is:

For non-dividend paying stocks (e.g. some speculative stocks) for which a loan was taken out to purchase them, were can the loan interest be taken into consideration when making a capital loss? When making a capital gain, the loan interest is added to the cost base, but when making a capital loss the reduced cost base is used, and loan interest cannot be included in the reduced cost as the third element no longer allows it (per private ruling 70225). Does this mean that loan interest on non-dividend paying stocks is only claimable if you make a capital gain (i.e by including it in the cost base), or can the interest still be claimed some other way in the event of making a capital loss? I'm not sure how, because for it to be claimable as a D7 or D8 deduction the stock would still have to be income producing...right??? Totally confused, as I'm sure others here are too, so replies to this tricky question are greatly appreciated. Thanks.

some education needed here - i think lol.

from the way i understand it, you are correct. interest is not included in the calc of your cost base fo losses. and as the stocks were non income producing (via divs) the interest was not 'deductible' either.

strongly assume the PR you quote is someone elses, rather than your own PR - available on website.

i think plenty of you do not want to be audited.

 

[luap77]

Just to clarify. In my understanding, for dividend paying stocks the interest costs are claimed as a deduction (see D7 and D8 for instance) as the dividends are considered income. Also, even if non-dividend paying, they can be claimed here as an income-producing deduction as long as you are a trader (all proceeds are income, as opposed to being capital gains if you are an investor). However, if you are an investor, then for non-dividend paying stocks the interest costs cannot be claimed as a deduction but can be included in the cost base if making a capital gain. The third element of the cost base explicitly states this. However, things are not so clear as to how (or if) interest costs can be taken into account if making a capital loss, hence my tricky CGT question. The private ruling isn't mine, however an ATO tax specialist referred me to this ruling when I asked for confirmation of interest being claimed as part of cost base for capital gains. Said this was correct. So, I'm still wondering whether (and where) I can take into account the interest I paid on money used to buy stocks that later made a capital loss when sold.

 

[intense jono]

The taxpayer would not be entitled to claim a deduction because the taxpayer has no intention to derive income from the asset.

The interest would be capitalised and added to the cost base under the third element. To quote the ATO "Non-deductible interest on borrowings to finance a loan used to acquire a CGT asset and on loans used to finance capital expenditure you incur to increase an asset’s value are also third element costs."

I'm not too sure why you think it wouldn't be (??)...

 

[So_Cynical]

The taxpayer would not be entitled to claim a deduction because the taxpayer has no intention to derive income from the asset.

So if he had the intention of holding for dividends (in a non dividend paying stock) he would be ok? lol

 

[Garpal Gumnut]

Jeez, I had a headache reading the first post.

Sounds like an Accountants and Lawyers Picnic.

gg

 

[luap77]

Thanks to those of you who replied to my question. I'm still completely confused, and the ATO is seemingly unable to clarify things for me w.r.t. whether it is possible to claim loan interest on stocks making a capital loss. I think it's time to start searching for a good accountant, as the safe alternative is simply to not claim these interest costs (in the case of capital losses). I'll be claiming loan interest for my speculative stocks making capital gains (as part of the cost base) as the wording in the tax booklet is very clear and 2 calls to the ATO confirmed that this is the correct way of doing it in my case. Thanks again, and hope this thread has been of some use to others in a similar situation (must be a few). Cheers.

 

[skc]

What happens if a usual div-paying stock decided to withhold dividend for the year (e.g. QAN), or if a non-div paying stock had some spare cash lying around (e.g. LNC). So you add the interest to the cost base in some years and claim the interest as deduction as other years?

And how would it work if I have a line of credit supporting a portfolio of shares. How does one allocate which share is funded by the loan vs which share is funded by my own money?

This division of div-paying vs not paying stock sounds crazily impractical - although that may not be too inaccurate a description of our tax system.

 

[So_Cynical]

What happens if a usual div-paying stock decided to withhold dividend for the year (e.g. QAN), or if a non-div paying stock had some spare cash lying around (e.g. LNC). So you add the interest to the cost base in some years and claim the interest as deduction as other years?

And how would it work if I have a line of credit supporting a portfolio of shares. How does one allocate which share is funded by the loan vs which share is funded by my own money?

This division of div-paying vs not paying stock sounds crazily impractical - although that may not be too inaccurate a description of our tax system.

I know i treat all my stocks as an investment and buy them with the intention of producing an income...ive never seen anything in the ATO literature that says im doing anything wrong, or that i cant treat non divi paying stocks as income producing.

 

[intense jono]

Thanks to those of you who replied to my question. I'm still completely confused, and the ATO is seemingly unable to clarify things for me w.r.t. whether it is possible to claim loan interest on stocks making a capital loss. I think it's time to start searching for a good accountant, as the safe alternative is simply to not claim these interest costs (in the case of capital losses). I'll be claiming loan interest for my speculative stocks making capital gains (as part of the cost base) as the wording in the tax booklet is very clear and 2 calls to the ATO confirmed that this is the correct way of doing it in my case. Thanks again, and hope this thread has been of some use to others in a similar situation (must be a few). Cheers.

Can you please explain to me why you think the interest cannot be capitalised and attributed towards the capital gain / loss ?

Cheers

 

[intense jono]

What happens if a usual div-paying stock decided to withhold dividend for the year (e.g. QAN), or if a non-div paying stock had some spare cash lying around (e.g. LNC). So you add the interest to the cost base in some years and claim the interest as deduction as other years?

And how would it work if I have a line of credit supporting a portfolio of shares. How does one allocate which share is funded by the loan vs which share is funded by my own money?

This division of div-paying vs not paying stock sounds crazily impractical - although that may not be too inaccurate a description of our tax system.

It all comes down to the taxpayers intention. If your intention is to hold QAN shares to derive income, then you will be entitled to claim the interest as a deduction. If QAN decide to not pay a dividend, then it won't make any difference as your intention remains the same - i.e. to hold the asset for income producing purposes.

It's similar to a rental property. The taxpayer can claim rental deductions when a rental property is 'available' for rent. This doesn't necessarily mean the property is actually deriving income. All it means is that the property is available for people to rent it if they decide to come along and rent. You're not penalised if people don't want to rent your property.

 

[Jonathan111]

Hi Luap77,

Did you get a resolution to your query?

I have the same issue:
Got a loan for shares.
Purchased shares (non dividend paying).
incurred costs and interest last FY.
Did not sell any of these shares yet.
[made a capital gain on other shares i bought with other funds, my own savings]
Can i use these costs in any way to reduce my capital gains or tax payable? or
Can i use these costs incurred last FY in the next FY?

Regards,
Jonathan

 

[Moriarty]

If you want more information on deductibility of interest, take a look here: http://www.ato.gov.au/content/21749.htm). One of the specific points made is that if you earn dividends on your shares, then expenses such as interest can be claimed as expenses incurred in the earning of assessable income.

I had a read of the private ruling you mentioned, and it does very clearly state that the third element of the cost base (incl. interest) is not to be included if a capital loss is incurred, but based on the information above, I don't see any reason why the interest should not be deductible as incurred. However, in the event that you've capitalised the interest in previous years and then made a capital loss in the current year, I'm not aware of any provision that would allow you to then deduct the interest instead. It may be possible to amend the prior years' tax returns to claim the interest that was overlooked, but this is something you would have to speak to a tax agent about.

Disclaimer: The above should not be taken as taxation advice, but is merely intended to provide information on the areas you should be looking at in determining for yourself how these interest costs should be claimed.

 

[Jonathan111]

I found this article:

http://www.fatcat.com.au/news/home/Your+Money/254_0.html

It’s tax time and this means working out how much money you’ve made or lost on the stockmarket this financial year and how much tax you’re up for.

With the help of Tax for Australians for Dummies, written by tax specialist Jimmy B. Prince (2009 Wiley Publishing Australia) – we’ve highlighted some of the essential points for share traders.

First up, do you run a share trading business or do you simply invest in shares?

The reason we ask is that share traders are taxed differently to share holders. Indeed, there are perks for those classified by the Tax Office as share traders, including the ability to write off share losses against other assessable income (such as a salary), plus the fact that share-trading expenses like brokerage can be claimed as a tax deduction. Share holders don’t enjoy such perks.

We spoke to Prince personally, who reiterated this point. "If you can demonstrate you are carrying on a share trading business, all share profits are liable to tax, and any losses you incur can be offset against your salary and wages, investment income and any other business profits you derive," he says.

"The fact that you may be a salary or wage earner, investor or someone carrying on business as a plumber, accountant, dentist etc, does not alter the fact that you may be treated as carrying on a share trading business...the classification is merely for the purposes of determining how your gains and losses will be taxed.

"You will generally find taxpayers will try to argue that they are carrying on a share trading business only when they make substantial losses! This is because if they succeed they can claim the losses immediately! If they can't prove that they are carrying on a share trading business, the losses are 'quarantined' and can only be offset against a current or future capital gain (which may never happen)."

The ATO website offers an example to help you determine the category that sums up your situation.

The ATO profiles Molly, an electrical engineer, who decides to take up share trading after watching a television program. Molly sets herself up in a room in her house with a computer and internet access. She has available $100,000 of her own money and an extra $50,000 investment loan to buy shares.

Molly conducts daily analysis on the equity market using information gleaned from financial newspapers, magazines and stock reports. She buys and sells shares online using an online broker.

Over the course of the financial year Molly purchases shares 35 times and sells shares 25 times – for a total of 60 transactions. Her average buying price is $1,000 and her average selling price is $1,800. She holds the shares for an average of 12 weeks.

All up, Molly loses $5,000 after expenses.

The ATO says: “Molly's activities show all the factors that would be expected from a person carrying on a business. Her share trading operation demonstrates a profit making intention even though a loss has resulted. Molly’s activities are regular and repetitive, and they are organised in a business-like manner. The volume of shares turned over is high and Molly has injected a large amount of capital into the operation.”

So there you have it. If this sounds like you then what are the perks?

The advantages of being a share trader

• Share traders can offset any trading losses incurred over the financial year against other assessable income.

• Costs incurred in buying or selling shares are an allowable deduction in the year in which they are incurred.

The bad news is that you can’t take advantage of the 50% capital gains discount on shares held for more than 12 months. But as a share trader, you probably wouldn’t hold shares for this long anyway.

The best way of looking at it is that share traders buy and sell shares to profit, whereas share holders buy shares as an investment. In the same vein as other businesses, any profits made by the share trader are regarded as assessable income, and all costs incurred in running the business are deductible.

Tax for share holders

The ATO uses George, an accountant, as an example of a share holder. George purchased 200,000 shares in twenty blue chip companies over several years. His total portfolio cost $1.5 million. George bought the shares because they paid consistently high dividends. He does not intend to sell the shares unless their price appreciates markedly. By the end of the financial year, George sold 20,000 shares for a gain of $50,000.

The ATO says: “Although George has made a large gain on the sale of shares, he would not be considered to be carrying on a business of share trading. He has purchased his shares for the purpose of gaining dividend income rather than making a profit from buying and selling shares.”

Share holders cannot offset share losses against other assessable income, such as income from a wage or salary. Instead, any losses must be carried forward and offset against future capital gains made from the sale of shares or other investments such as property (except collectables). Furthermore, any costs incurred in buying and selling shares cannot be claimed as a tax deduction but are instead taken into account when calculating any capital gain made.

For share holders profits made on shares are not classed as assessable income, but as a capital gain and are subject to capital gains tax. If the shares have been held for more than 12 months then they are eligible to receive the 50% capital gains discount. That means you only pay tax on half of the capital gain made. This is a major tax perk for the share holder.

Tax For Australians for Dummies offers a handy checklist to help determine your classification as either a share trader or share holder:

• Do you intend to make a profit?

• Are you running your activities in a business-like manner?

• How much capital have you invested?

• Do you trade on a regular basis (for example, 10 trades a week)?

• What volume of trades do you make each year (for instance, 100 trades a year)?

• Do you keep proper records (for example, buy and sell contract notes)?

Prince says that share traders don't have to set themselves up as a sole trader with an ABN, nor quote this ABN to a stockbroker. He says that the biggest stumbling block from being accepted as running a share trading business is the volume of trades you make each year. Generally speaking, the more trades you make the greater the chance of being accepted as a share trader.

According to the ATO, being accepted as carrying on a share trading business doesn't hinge on the amount of money that you have available for share trading. The ATO writes: “The amount of capital that you invest in buying shares is not considered to be a crucial factor in determining whether you are carrying on a business of share trading. This is an area in which it is possible to carry out business activities with a relatively small amount of capital. Conversely, you may also invest a substantial amount of capital and not be considered to be a share trader.”

Not a share trader for tax purposes? Don't fret, there are other perks for share holders


One of the big perks for share holders is the ability to claim as a tax deduction any interest costs on an investment loan to buy shares. And if you pay the interest up front before the end of the financial year (say before 30 June 2009) then you can shove it onto your 2008/09 tax return for an instant deduction.

The catch here is that the shares purchased with the loan must pay dividends, or have a history of distributing dividends to shareholders. Therefore, always check up on the dividend paying history of the company.

According to Prince, if the company has never declared a dividend, there’s a strong possibility the interest expense may not be tax deductible. Be careful of speculative stocks such as mining companies and the like; the tax office won’t be too pleased to see you claiming a tax deduction for buying stocks that can barely pull a profit let alone pay dividends to shareholders.


If you’ve borrowed money to buy a stock that doesn’t distribute a dividend, not all is lost, writes Prince. He offers an example that we’ve included below.

Angela borrowed $30,000 to buy shares in a mining company that didn’t declare a dividend. She paid $30,000 for the shares and sold the shares today for $40,000. Over that period she paid $3,000 in interest on the investment loan. The Tax Office advised her that the interest isn’t tax deductible as her mining shares didn’t pay dividends. In this case, the interest can be added to her cost base:


Capital Proceeds $40,000


Less


Cost Base


Purchase Price $30,000


Non-Capital Costs $3,000 $33,000


Net Capital Gain $7,000

As you can see, the interest cost reduces the capital gain from $10,000 to $7,000.

And finally, because this is an article on tax - we must highlight that this is for general information only and does not relate to your situation specifically, so please check with your accountant for more information.

 

[Moriarty]

I found this article:

The reason we ask is that share traders are taxed differently to share holders. Indeed, there are perks for those classified by the Tax Office as share traders, including the ability to write off share losses against other assessable income (such as a salary), plus the fact that share-trading expenses like brokerage can be claimed as a tax deduction. Share holders don’t enjoy such perks.

We spoke to Prince personally, who reiterated this point. "If you can demonstrate you are carrying on a share trading business, all share profits are liable to tax, and any losses you incur can be offset against your salary and wages, investment income and any other business profits you derive," he says.

This is only true if your 'business' of carrying on share trading meets one of several tests under the ATO's non-commercial loss provisions. The specific tests are outlined here: http://www.ato.gov.au/businesses/content.aspx?menuid=0&doc=/content/00268103.htm&page=2&H2 but the general gist of it is that you need to be generating significant revenue from trading, or have booked profits in 3 of the last 5 years to be able to claim your current-year losses against your other income (eg. wages). Otherwise, the loss will be carried forward to be offset against future business profits.

It's pretty clear that you can claim interest on a loan used to buy shares provided those shares pay dividends, and in the case of a portfolio purchased with a loan, it may be possible to claim the portion of the interest associated with the purchase of the dividend-yielding shares within the portfolio.

As always, this isn't intended to be taxation advice in any form, and should not be taken as such.