It’s no secret that understanding all of your tax deductions when it comes to investments such as shares, property and cryptocurrency is a bonus when it comes to maximising tax deductions. After all, you take the risk of investing to make a profit, not to give it all to the Australian Taxation Office (ATO). Many investments require a loan and the good news is that loan interest is a valid tax deduction.
Some examples of activities that could make interest expenses tax-deductible include:
- Buying a rental property (even if it’s considered a capital asset like property)
- Using a bank overdraft to pay for business expenses and operations
- Paying for current business expenses
Claiming interest income expenses
When it comes to investment accounts, such as a cash management account, you may be eligible to claim a deduction for account-keeping fees listed on your statements. However, if the account is held jointly, the deduction can only be claimed for your portion of the fees, charges or taxes. It’s important to note that deductions cannot be claimed for interest on personal tax debt, such as a loan taken out to pay taxes.
Pro Tax Tip: Interest on a loan is not tax-deductible unless the funds from the loan are used to acquire or maintain an income-producing investment.
Claiming dividend and share income expenses
Interest charged on loans taken out to purchase shares or other similar investments that generate assessable interest or dividends are tax deductible. Any expenses on interest you claim can only be attributed to the business-related portion. If your loan is for both personal and business use, you’ll need to apportion the business use.
Additionally, it’s important to note that deductions cannot be claimed if the income generated is exempt, such as in the case of exempt dividends.
Pro Tax Tip: Thinking about a loan and in the information-seeking stage? Attending an investment seminar in relation to an existing investment may qualify you for a tax deduction on expenses that pertain to generating investment income.
Claiming managed investment trusts
Managed Investment Trusts (MITs) are a way for people to invest in passive income activities collectively, such as shares, property, or fixed-interest assets. In MITs, member contributions are pooled, and the trust’s assets are managed by a professional manager, rather than by the individual members. As an investor in these products, you must report any income or credits you receive from any trust investment product on your tax return. This includes income or credits from cash management trusts, money market trusts, mortgage trusts, unit trusts, and managed funds such as property trusts, share trusts, equity trusts, growth trusts, imputation trusts, or balanced trusts.
When it comes to tax deductions for MITs, eligible expenses can include management fees, specialist journals, and interest on money borrowed for investment. However, if you made a prepayment of $1,000 or more for your managed investment, there are special rules that may affect the amount you can deduct.
Claiming rental and holiday home expenses
When it comes to rental properties, you may be able to claim a deduction for interest and borrowing expenses related to the property during the time it is being rented out or is available for rent. However, it is important to note that deductions can only be claimed for expenses related to the income-generating use of the property.
This means investment properties will qualify, but deductions are not available for the interest on your primary residence. The general rule when borrowing to purchase an investment property is that interest charges on the mortgage are tax-deductible, but principal (or capital) repayments are not. This tax-deductibility of interest is one of the reasons why property investment is so appealing for many, as it allows for negative gearing, where losses (including interest deductions) can be offset against other income on your tax return.
Pro tax Tip: Deductions cannot be claimed for travel expenses related to a residential rental property unless you are in the business of renting properties or fall under the category of an excluded entity.
In addition to interest on loans taken out to acquire a property, you may also be able to claim deductions for interest on loans used for other related expenses such as renovations, the purchase of depreciating assets (like furniture), repairs, or maintenance. However, it’s important to note that interest on loans taken out to purchase land on which a property is to be built, also known as vacant land, is not generally tax-deductible until the property is complete and actively being rented out.
Claiming interest on bank accounts
Interest earned from banks or other financial institutions is considered as assessable income for the tax year, even if the funds that generated the interest were not subject to tax. For example, if you received prize money and deposited it into your bank account, you wouldn’t need to include the prize money on your tax return, but you would have to include the interest earned on it. Additionally, you can claim tax deductions for expenses incurred in earning interest income or income from friendly society income bonds. Banks and other investment entities report the interest they pay to account holders and investors to the Australian Taxation Office (ATO). The ATO checks this information against tax returns to ensure that all income is reported correctly. If there is a discrepancy, the tax return may be adjusted and penalties may apply.
What can be claimed as tax deductions?
There are several costs that can be claimed as deductions on your taxes. These include expenses such as management fees, costs for investment advice, a portion of expenses incurred in managing the investments, such as travel expenses, specialist investment journals and subscriptions, borrowing costs, internet access, and the decline in value of your computer. Additionally, if you are an Australian resident and receive a dividend from a Listed investment company (LIC) that includes a capital gain amount, you may be able to claim 50% of that amount as a deduction.
What can’t be claimed as tax deductions?
When investing in shares, there are certain expenses that cannot be claimed as tax deductions. These include fees incurred for creating an investment plan, unless you are operating an investment business. Additionally, interest expenses incurred through borrowing money under a capital protected borrowing arrangement to purchase shares, units in unit trusts, or stapled securities are not deductible as the interest is considered as the cost of the capital protection feature.
Pro Tax Tip: You may be eligible to claim a portion of the decline in value of your computer based on the percentage of usage related to managing your investments in shares, securities or similar that earn interest. You can only claim this portion of the decline in value once, either as an Interest deduction or dividend deduction.
Claiming loan interest deductions can be complex and it is essential to have a clear understanding of the rules and regulations that apply. A tax agent has the knowledge and expertise to help you identify the deductions that apply to your specific situation, and to ensure that your claims are accurate and comply with the regulations. They can also provide valuable advice and guidance on how to claim loan interest deductions, and how to maximize your potential tax refund.