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INVESTMENTS AND TAX ✦ The investor has two great benefits from the tax legislation in Australia
T
he first is Section 8.1 of the Income Tax Assessment Act 1997 which states: “You can deduct from your assessable income any loss or outgoing to the extent it is incurred in gaining or producing your assessable income.” The second is the capital gains discount introduced by John Howard in 1999.
Section 8.1 Income Tax Assessment Act 1997 At first glance Section 8.1 looks as if it can cover almost anything. But further on the section says:
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1. You can’t deduct losses or outgoings of capital or of a capital nature (eg: the amount of the principal repayment on a mortgage payment); 2. You can’t deduct losses or outgoings of a private or domestic nature (eg: clothing, most travel to and from work); 3. If a part of the taxation legislation prevents you from claiming it (eg: travel to residential investment properties to inspect or carry out repairs).
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So, if you borrow money to buy an investment property which you are going to receive rent from or to buy shares that pay dividends the interest expense will normally be tax deductible. The important question is what was the money borrowed for, not what is the bank or credit union using for security. One fee that people might not be aware that can be claimed is the expenses of ongoing financial advice which leads to, or is directly associated with, a specific investment which produces assessable income. So the initial cost of getting a financial plan drawn up is regarded as a capital expense because it is before you earn financial income. Generally the ongoing fees would be tax deductible.
Capital Gains Discount From 1985 to 1999, Australians paid capital gains tax based on the actual gains after inflation. So if you bought something for $100,000 and the consumer price index increased 20% resulting in an indexed cost base of $120,000 ($100,000 plus 20% of $100,000), you paid capital gains tax on any excess you received above $120,000. If you received $150,000
