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Edited version of your written advice
Authorisation Number: 1012697745769
Ruling
Subject: FMG margin loan share dividend deduction
Questions & Answers
1. For the year ended 30 June 2013, should your interest paid on the margin loan used to purchase shares in a publicly listed company be carried forward as an expense deduction against your capital gain when the shares are sold?
No. The interest expense should be claimed as a dividend deduction.
2. For the years ended 30 June 2014 and for the future years (list below), can you claim, as a dividend deduction, interest paid on the margin loan used to purchase shares in a publicly listed company?
Yes.
Reasons for decision
2013 income & future income years
Subsection 110-25(4) of the Income Tax Assessment Act 1997 (1TAA 1997) provides the third element of the CGT cost base includes interest on money you borrowed to acquire the asset.
However, subsection 110-45(1B) of the ITAA 1997 provide expenditure does not form part of the second or third element of the cost base to the extent that you have deducted or can deduct it.
Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent which they are incurred in gaining or producing assessable income, except where the loss or outgoing relates to the earning of exempt income, or is of a capital, private or domestic nature.
The reference to 'assessable income' in section 8-1 refers not only to assessable income derived in any particular year but also to assessable income that the relevant outgoing would be expected to produce. Therefore, the fact that a taxpayer does not derive any assessable income, as a result of incurring interest expenses to purchase shares, does not prevent them from being entitled to a deduction, as long as the incurring of the interest expenses is expected to produce assessable income.
Taxation Ruling IT 2606, which is about deductions for interest on borrowings to fund share acquisitions, provides, as a general rule, interest on money borrowed to acquire shares will be incurred in gaining or producing assessable income where it is expected that dividends or other assessable income will be derived from the investment. Such an expectation will usually exist as shares, by their very nature, are inherently capable of generating dividends, whether in the short or long term. However, such an expectation must be reasonable and not a mere theoretical possibility; there must be a prospect of dividends or some other assessable income being received.
Income Tax Ruling IT 2606 also states a deduction for interest will not be allowable where shares were acquired solely for the purpose of capital profit on their resale.
In your case, you purchased shares in a publicly listed company. Based on the nature of the listed shares and the timing of your investment, there was reasonable expectation you would receive dividend income from your shares. It follows your entire interest expense in relation to your shares is deductible in the relevant income years it was/is incurred.