Tax deduction for loan valid in some scenarios

NOEL WHITTAKER

YOUR ADVICE

LET’S assume I borrow $100,000 against my property to buy shares. I understand that the interest on the loan will be tax deductible because the purpose of the loan was for investment. What is the position if I sell the shares in the future and use the proceeds for a private purpose; is the interest on the original $100,000 loan still tax deductible?

The interest on a loan is only tax deductible if the borrowed money was spent on an asset that is currently being used to produce income. There is an exception if the asset is sold for less than the loan balance, but only if all of the sale proceeds were used to pay off the loan. So the simple answer is that it is not deductible if subsequently used for a private purpose.

ABOUT three years ago I invested $40,000 in managed funds from my own savings. Now I have an approved home equity loan of $100,000 and also a mortgage of $250,000. I plan to sell the managed funds to reduce my mortgage and will then reinvest in more managed funds using a homeequity loan so I can claim a tax deduction for the interest. Instead of selling the managed funds, can I transfer $40,000 from my home equity to my home loan and claim a tax deduction on interest against the managed funds?

The basic principle is that the purpose of the loan must be to invest in income-producing assets if you are to be able to claim the interest as a tax deduction. Merely switching the loan from one account to another is not enough to achieve this. You will need to redeem the managed funds, pay the proceeds off the nondeductible home loan and then make a redraw on the new loan account. Make sure you keep the two loan accounts strictly separate to minimise problems with the tax department.

I HAVE a self-managed super fund and I was interested to read your response to a question about transfer of shares held by the fund to the trustees to meet the required minimum annual pension drawing by June 30, 2017. I did this for the 2015-16 tax year but was advised by my accountant that the ATO now requires shares to be sold and not transferred to fund the drawdown. Is the accountant’s advice correct?

Yes, the accountant is correct because APRA/ATO consider that a pension must be “paid” – i.e. the benefit provided in money, and as such an “in specie” transfer of an asset does not count. An in specie transfer of an asset could once be used to make a lump sum benefit, and the pensioner could elect to treat the lump sum payment as a payment usually for the purposes of pension minimum.

However, from July 1, 2017, the ability to treat lump sum payments as pension payments was removed, and therefore, an in specie transfer of shares cannot be used to meet the minimum pension requirement.

Noel Whittaker is the author of Making Money Made Simple. His advice is general in nature and readers should seek professional advice before making any financial decisions. Email: noel@noelwhittaker.com.au