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Borrowing to buy shares

May 05, 2011

A common, yet risky, investment strategy used by share investors has been to borrow money, usually via a margin loan, to buy shares.

Borrowing is a good strategy in a rising market, but it can multiply any losses in a falling market. The last thing you want is a loan to repay but no shares to show for it. Don't consider borrowing if you are new to investing.

Just like the tax rules for investment properties, if you borrow money to buy a share portfolio, you can claim a tax deduction for the loan interest, provided it is reasonable to expect that assessable income (dividends or capital gains) will be derived from the share investment. If the loan has a private component, you will only be able to claim interest incurred on the part of the loan used to acquire the shares.

The benefit of such a strategy is that the interest expense should offset any dividend income received, resulting in franking credits that can be offset against other taxable income.

Hopefully the shares increase in value under this strategy and any capital gains are only realised in a later year when the taxpayer is on a lower tax rate, for example, in retirement.

If you expect to earn a lower income next tax year (for example, due to redundancy or maternity leave) an excellent strategy to consider is prepaying interest 12 months in advance before year end on your margin loan to maximise your tax deduction based on the higher marginal tax rate.

Borrowing expenses (such as establishment fees, legal expenses and stamp duty on loans) may be claimed for tax purposes. If borrowing expenses are more than $100, then they must be apportioned over five years or over the term of the loan, whichever is less. Borrowing expenses under $100 are fully deductible in the year incurred.

For a borrowing strategy to work you need to get a return greater than the cost of the interest rate that you are paying (which is generally at a premium for margin loans), otherwise you are falling further behind despite receiving the tax benefi ts. Remember the ABC motto: Absolute Bloody Cash!

Some investors use a capital protected borrowings strategy, where shares are bought using a borrowing arrangement where the borrower is wholly or partly protected against a fall in the market value of the investments.

Any interest paid for capital protection under a capital protected borrowing arrangement for shares is not deductible but instead is treated as if it were a payment for a put option.

While there was a change in the laws in September 2007 that made it possible to borrow within self managed super funds, special rules apply. Seek professional advice on how to structure such a borrowing to avoid any contravention of the complex superannuation rules.

Tags: 101 WaysBorrowingDeductionsPersonal taxShares

Author: Mr Taxman

Comments

""Just like the tax rules for investment properties, if you borrow money to buy a share portfolio, you can claim a tax deduction for the loan interest, provided it is reasonable to expect that assessable income (dividends or capital gains) will be derived from the share investment. If the loan has a private component, you will only be able to claim interest incurred on the part of the loan used to acquire the shares. The benefit of such a strategy is that the interest expense should offset any dividend income received, resulting in franking credits that can be offset against other taxable income. Hopefully the shares increase in value under this strategy and any capital gains are only realised in a later year when the taxpayer is on a lower tax rate, for example, in retirement." Please can I find a section in tax legislation (1936 or 1997) to support this argument."

By: Aloha on May 29, 2011 1:23AM

"Aloha - item D8 in the individual tax return allows for this deduction http://www.ato.gov.au/individuals/content.aspx?doc=/content/00222869.htm "

By: Mr Taxman on May 29, 2011 12:08PM

"Many Thanks Mr Taxman. The information is helpful."

By: Aloha on Jun 02, 2011 1:20PM

"Can I still claim interest costs on money borrowed to buy shares that are now worthless?"

By: Scott on Oct 23, 2011 5:03AM

"Just like the tax rules for investment properties, if you borrow money to buy a share portfolio, you can claim a tax deduction for the loan interest, provided it is reasonable to expect that assessable income (dividends or capital gains) will be derived from the share investment. So if your investment will not derive an income any more then you cannot claim interest going forward."

By: Mr Taxman on Nov 28, 2011 11:17AM

"I purchased some shares sometime in 2010 using the money that I borrowed from a bank. I received some dividend for the shares. Before reading your blog I had an impression that I could claim the interest paid on the borrowed money after selling. Is it ok to claim the interest for the financial year 2010-11 on my tax return for 2011-12?"

By: Athar on Aug 21, 2012 10:27PM

"You should claim the 2010/11 interest in that year's return - you can request the ATO to issue you with an amendment of your taxable income."

By: Mr Taxman on Aug 24, 2012 12:24AM

"I borrowed $50K to purchase some managed investments a couple of years ago, and this year sold out at a partial loss. I have put all of the proceeds in a high earning cash management account while I decide to (soon) reenter the market. This money is earning interest so I imagine I can claim the interest expense on the loan? Is this correct?"

By: Ryan on Sep 13, 2012 8:07AM

"If you can demonstrate that the cash management acocunt is purely investment & you haven't used any of the funds for personal/living purposes then you should be able to claim the interest expense against your interest income."

By: Mr Taxman on Sep 19, 2012 8:43AM

"Should the personal loan secured by shares to get tax deduction? or loan purpose on the loan application and on the contract sufficient? "

By: Mana on Sep 25, 2012 9:22PM

"Doesn't matter what security (if any) for the loan nor what you put down as purpose in the loan application. What matters is where you actually put the borrowed funds once you get the loan monies - if personal purposes (eg credit card debt) then not deductible. If for a share portfolio, then it would be deductible."

By: Mr Taxman on Sep 29, 2012 12:26AM

"Hi I had a share trading and investment loss in my wife's account over the past 5 years. Can I claim it as bad debt in my tax return as she has not income. Can I declare it as a loan that will never be recovered? Thanks"

By: Sach on Feb 02, 2013 12:50PM

"Nice thinking but unfortunately not Sach. In order to claim a bad debt you need to have previously declared it as income (which you wouldn't have done). "

By: Mr Taxman on Feb 02, 2013 11:34PM

"When you aay previously declared as income means what ? "

By: Shane on Jul 04, 2015 11:35PM

"Hello Can i redraw monies from my home loan to buy shares and then claim the interest or do i need to create a new loan to be able to claim the loan interest on shares purchased? Thanks"

By: Clarst on Mar 16, 2013 7:24AM

"By all means you can re-draw to buy shares & claim the portion of interest however the calculations can get quite messy particularly if you do additional re-draws in the future that are not investment related. Ideally, it would be desirable to have a separate loan (or split loan) to easily identify the deductible interest expense relating to your shares. "

By: Mr Taxman on Mar 24, 2013 10:14PM

"Can you explain the split load please? I have 150k in the redraw which I want to invest. How do I split the loan so the 150 in redraw is in its own loan? Also will that loan be charged at the same interest rate as my home loan? Thank youi"

By: brad on Jun 05, 2015 8:48AM

"Re-drawing from a line of credit to buy shares is deductible. My situation though involves an off-set account. I am about to retire and my lump sum will be greater than my mortgage. If the balance in my off-set exceeds the house loan and then I withdraw, would the interest on the loan then be deductible?"

By: Geoff on Mar 29, 2013 4:17AM

"An offset account is separate from your loan account. If you have interest charged on your loan (no matter what size) and you originally used the funds borrowed for an investment (eg rental property or shares), then you can claim the interest. If the borrowing was for personal purposes then always non-deductible."

By: Mr Taxman on Mar 31, 2013 10:14PM

"My loan account allows for redraws at no cost. From what you said I may have to take the extra step of actually transferring the retirement funds into the loan account and then redrawing. My loan would be a redraw facility under paras 8 to 11 of TR 2000/2 and would be deductible as per para 23."

By: Geoff on Apr 01, 2013 5:43AM

"Do the shares purchased need to be publicly traded? I am looking into borrowing money to buy into the family business. We are a privately held C corp."

By: Ben on Apr 10, 2013 12:25AM

"I may not sure if you are aware Ben that this is an Australian-based website & my knowledge of international tax laws is flimsy at best. However, if you were in Australia & borrowed money for investing in a private company then the interest would be tax deductible here."

By: Mr Taxman on Apr 10, 2013 9:25PM

"Can i claim all the interest as a tax deduction on a loan that is used to buy shares if the loan is in 2 names"

By: Daniel on May 09, 2013 9:03AM

"If you can demonstrate that you used the funds for shares in your name then you can claim the interest."

By: Mr Taxman on May 09, 2013 11:50PM

"We have a loan for an investment property in my husband's name that is now paid off using our combined income. If he draws down the loan again and transfers the funds into my name for investment in shares, could he still claim the loan interest on his tax return, with the profits/dividend income in my name? "

By: Sally on Jul 01, 2013 12:05AM

"if he doesn't have the shares to derive income for himself then he won't be able to claim the interest on the drawdown."

By: Mr taxman on Jul 04, 2013 11:06PM

"Can I borrow money from a family member to buy shares and then claim the interest as a deduction?"

By: Ivan on Aug 06, 2013 9:29PM

"Yes that would be possible - the family member would need to show the interest received as income."

By: Mr Taxman on Aug 14, 2013 7:42AM

"Hi. I have about $40000 worth of shares in a company. If I borrow $10000 and use it to buy more shares in the company I can claim the interest (pays dividends). Will the taxman care if a couple of weeks later I sell $10000 worth of the shares (that i already held in that co.) given that the ones actually being sold we're purchased years ago?"

By: Steve on Aug 23, 2013 9:21PM

"that will be fine."

By: Mr Taxman on Sep 19, 2013 4:45AM

"Hi. Is it OK to claim interest paid on a margin loan if the share dividends are reinvested as part of a dividend reinvestment plan rather than getting the dividend as an actual payment? Thanks"

By: Brendan on Sep 25, 2013 2:55PM

"Hi. I prepaid interest on a margin loan for the value of $20,000 in June 2013. Can I claim the interest expense as a deduction for the 2012/13 financial year if did not purchased shares using the loan until July 2013? Thanks"

By: Jared on Sep 28, 2013 3:33AM

"Hi Mr Taxman. I have a line of credit used to purchase shares. The Line of Credit is in joint names with my wife. The share trade account is in joint names with my wife. My wife earns about 5% of our joint income. Can I claim 95% of the interest cost as well as obviously 95% of the gains and dividends. If so, is there a tax publication that states this? Cheers "

By: Anthony on Oct 21, 2013 12:12AM

"I borrowed money from my wife and invested in equity shares of a Private company. I pay her interest at 12% p.a. Can i claim the interest expense as a deduction on my return while she shows the exact same amount on her return ? Also, my investment did not pay a dividend this year but is likely/expected to pay dividend in future (i.e. profitable company) where the board defered dividend for the year "

By: MVc on Oct 25, 2013 3:25AM

"Hi...Is it possible to claim the interest charged on money borrowed to purchase shares when there were no dividends paid in that tax year? Thanks "

By: Anne on Dec 07, 2013 1:31AM

"You wrote: "Borrowing expenses (such as establishment fees, legal expenses and stamp duty on loans) may be claimed for tax purposes. If borrowing expenses are more than $100, then they must be apportioned over five years or over the term of the loan, whichever is less. Borrowing expenses under $100 are fully deductible in the year incurred." Just to clarify my understanding, can you please comment on the following. If an investment loan has an establishment fee of $300 then this fee has to be apportioned over 5 tax years or the loan term. If there is a monthly loan account keeping fee (say, $10 p/m) this is deductible in the financial year concerned. Is my understanding correct?"

By: Grace on Jan 03, 2014 11:42AM

"Hi If you purchase a portfolio partly paid by borrowed funds and partly by cash what is the story re: sales proceeds? Are you obliged to apportion it the same as the original investment? "

By: Nicko on Apr 05, 2014 6:38AM

"Hi. My son wants to buy small commercial property that he has been renting for 7 years. He has almost 1/3 as deposit, And repayments on my loan would be less/close to lease costs. He doesn't want to cross collateralise with his home which banks want todo. I want his name on certificate of title. Would I have to pay tax on the repayments he makes to my loan? & any other implications (other than if he defaults at any time). Thanks and regards, Lynda"

By: Lynda Vickery on Apr 28, 2014 1:06PM

"If I equity in my home to purchase shares can I claim interest paid on this loan if both the share dividends and the earnings on the shares are reinvested as part of a dividend reinvestment plan. I intend to invest through an SMA with all dividends and earnings reinvested. Also as I understand it I need to include the dividends in my tax return even if they are not paid directly into my account. Is this correct? "

By: Bernadette on Jun 02, 2014 5:58AM

"Hi Adrian, Have your book (2 updates actually), just looking on the site without luck to find a shares spreadsheet for tax time without luck"

By: Barry on Jun 19, 2015 10:48AM

"I recently purchased an investment in a Unit Trust for $100,000 through a separate loan. The unit trust issued a return of capital of 100 cents in the dollar, but I still receive investment income of approximately 4.5%. I still hold the same unit holding. Do I need to apply the $100,000 I have received as a return of capital against the loan, or can I put it against my personal home loan. I'm thinking as I'm getting income, it would be good to continue to offset the interest deduction of the loan against it... hope that makes sense."

By: Anthony on Oct 07, 2015 1:51PM

"Hello, If I borrow from a line of credit to buy shares is the interest only tax deductible on dividend payments and further more only claimable on any un-franked amounts? What if I sell these shares in the tax year? Will the expenses in borrowing reduce my income and indirectly offset any capital gain made?"

By: Andrew on Nov 09, 2015 3:47AM

"THe interest will be deductible for the period that you hold the shares & will reduce your taxable income (and by default the net amount of tax that you would have to pay on any dividends & capital gains)"

By: Mr Taxman on Mar 20, 2017 2:47AM

"Hi, I was wondering if I have borrowed money to buy speculative shares with no dividends and I have made a loss on the sale of those shares, do I combine the loss in value with the interest paid to arrive at my net loss or do I put the interest in the deductions and leave my net loss as that from the shares alone?"

By: Pash on Aug 07, 2016 3:59AM

"The interest expense would form part of your deductions in item D8 in the tax return."

By: Mr Taxman on Mar 20, 2017 2:44AM

"I am non-resident of Australia, I borrowed $250,000 throguh ANZ in Australia to buy shares in a company based in australia i received $25,000 as franked dividend and incurred an interest expense of $9241, will i be able to claim a deduction as interest expense , please suggest .."

By: Mcmahon on Mar 16, 2017 2:41AM

"Yes the interest would be deductible however as a non-resident you will not be required to declare fully franked dividends in your tax return."

By: Mr Taxman on Mar 20, 2017 2:46AM

"Hi, interest deductions aside, I'm wondering if I borrow $50,000 to buy shares and those shares double in price and I then sell half of those shares whilst continuing to hold the other half and then pay back the $50,000 loan, would I still have to declare that $50,000 I obtained from selling half of the shares as profit even though I haven't actually made any realised profit until I sell the other half of the shares? Thanks in advance"

By: delish on Apr 08, 2017 10:12AM

"You would need to pay tax on the $25k that was realised. THe other $25k gain remains unrealised & as such not taxable still disposed of."

By: Mr Taxman on Apr 09, 2017 12:56AM

"Hi Mr Taxman, please advice me here, I took a loan of R1000 0000 and used R700 000 to buy Material for my business and the R300 000 used to buy Shares in a listed company. I have received dividend of R56 000 and I have interest of R100 000 to pay for the loan. Can I deduct the interest in my tax for 2017 period of assessment? "

By: Elvis on Apr 15, 2017 5:21PM

"NOt sure which country you are based Elvis - but in Australia you could claim the full interest amount as a tax deduction - although in two different parts of tax return (Business income & interest/dividend deductions). If the interest for the business resulted in a loss for the business then the loss may be quarantined unless you satisfy one of the non-commercial tests. But that is Australian tax law so may be different where you are!"

By: Mr Taxman on Apr 17, 2017 2:55AM

"Hi my husband and I took out a line of credit recently from a current investment property to buy a new investment property but didn't use it all. can we use the rest to invest in shares? will it bother the bank that we are using it for a purpose other than buying an investment property? should we apply for a separate line of credit purely for shares instead? Thanks"

By: TF on Jul 25, 2017 5:42AM

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