Resident tax expert Adrian Raftery, aka ‘Mr Taxman’, answers readers’ most pressing trading tax questions.

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

A. As with the tax rules for investment properties, if you borrow money to buy a share portfolio, you are able to claim a deduction for the interest expense in the year in which you incur it. There are a number of benefits from such a strategy, including the fact that the interest expense neutralises any tax payable from income received, whilst franking credits could be offset against other taxable income. If shares increase in value, ideally any gains are realised (and taxed) only in a later year when the taxpayer is on a lower tax rate, for example, in retirement.

However you can claim a tax deduction for the loan interest only if it is ‘reasonable’ to expect that assessable income (dividends or capital gains) will be derived from the share investment. If your shares are worthless and you do not expect to derive an income from them any more, you cannot claim interest...

Excerpted from an article originally published in the Jan/Feb 2012 issue of YourTradingEdge magazine. All rights reserved. © Copyright 2012, Your Media Edge Pty Ltd.
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