Ask An Adviser - Can I borrow against an existing share portfolio and claim a tax deduction?

Top answer provided by:

Eric Walters

There are a number of aspects to this question that need to be addressed: the first is in relation to the tax deduction.

Claiming a tax deduction:

To be eligible to claim the cost of borrowing, it must be raised for and used in a way that is intended to generate assessable income.  I won’t get any more technical than that in this answer, but if the deduction for the interest is expected in this financial year, there will need to be a high expectation of assessable income being generated in this financial year.  You will need to consult your tax agent to ensure that your plan to use the funds will meet the test.

If we can assume for this purpose, that you are proposing to borrow to make an income-producing investment, say to acquire more shares (or perhaps ETFs or managed funds), put a deposit on an investment property or invest in a start-up business for instance, then there is a high probability you will be eligible to claim the cost of interest incurred on the loan from the date the investment is made.  (You may also be eligible to claim a tax deduction for the borrowing costs over a prescribed period of time.)

 

Finding a lender:

The next issue to be addressed, is who you would use to raise this loan – again, I am assuming that you have an income-generating purpose similar to one of those outlined above as your plan.  Because you will be borrowing against a share portfolio, you will most likely be establishing what is termed a margin loan.  Under this arrangement, you will need to assign the portfolio to the lender and they in turn, will lend an amount that they assess as ‘safe’ (for their purposes) to do so against the shares in the portfolio: most margin lenders will advance between 50% and 75% of the market value of ‘creditworthy’ shares.  (There are many shares on the Australian markets against which no lender will advance funds.)

Loan Ts & Cs:

Then comes the lending terms and conditions.  As a consequence of the activities that were revealed during the Hayne’s Royal Commission into Misconduct in the Financial Services sector and that had devastating consequences for investors when the GFC hit some years earlier, lenders now need to be satisfied with aspects of the borrower’s creditworthiness.  They will consider your income – and its consistency and certainty; your fallback position should there be a major market correction or significant disruption to your loan-servicing capacity; and whether you are sufficiently risk-averse to be able to cope with all that the market in the asset you invest in, can throw at you (as will your financial planner – refer the Risk Profiling article linked below).  (The ASIC website page linked below provides considerable detail about this.)

Investment Gearing:

Borrowing to invest is known as gearing an investment – and this is exactly what you would be doing.  Gearing is a time-honoured strategy utilised by investors: it magnifies the potential for return on and growth of a portfolio – but that is a two-way street, whereby upward volatility favours the borrower, and downward volatility magnifying their loss.

Suggested reading, but advice recommended:

This is an area that you would benefit from seeking advice from a financial planner experienced in this area.  The advisers at my firm have clients with the type of investment discussed above – and we have published articles in our blog that might help to explain in more detail, some of the concepts I have raised.  ‘Gearing investments to accumulate wealth’, ‘Margin Loan Management’, and ‘Investor Risk Profiling explained’ are a few such articles, but I also commend the MoneySmart website (operated by ASIC) to provide general guidance on money management issues…. and if you want to get quite technical about margin lending constraints, try this ASIC website page.

While the Adviser Ratings Website facilitates the question and answer functionality, all such communications are between users and authorised financial advisers, of which Adviser Ratings has no affiliation. Adviser Ratings is not the advice provider and does not provide financial product advice and only provides information that is general in nature.

Article by:

Eric Walters

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