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Bank Rip-Offs Revealed - Click
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On 17-Apr-2003, the Australian Financial Review published an article reporting that the Federal Government is going to modify the legislation allowing investors to claim the full-interest costs on capital protected loans as a tax deduction. The change will apply to any such product taken out after 9.30am on 16-Apr-2003. Investments made prior to the 16-Apr-2003 will remain unaffected and will continue to be covered by any earlier product rulings made by the ATO.
Capital protected loans, also known as "protected equity loans" or "share purchase plans" allow investors the ability to obtain 100% gearing into shares, units, or managed funds without any risk of capital loss, with no equity contribution, and with no margin calls. With these loans, investors can make capital gains and receive the dividends, but their worse case is simply losing the money they have spent on the loan.
Effectively, the provider, such as a major bank, lends 100% of the purchase cost of the portfolio and the investor need only cover the interest costs for the loan. However, such interest costs are inherently high, between 18% to 25% depending on the term of loan taken (typically 1 to 5 years) and on the volatility of the underlying share. This high interest cost is due to the "insurance" or "put option" cost included within the interest figure which protects the investor and the institution from any capital loss should the underlying shares/units fall in value.
A few years ago, the ATO attempted to disallow the deductibility of the full interest amount on the tax return of a private investor. The investor subsequently challenged the ATO in court, and won (Firth v ATO).
The Federal Government is therefore now instituting legal change to prevent full deductibility. From now on, investors will no longer be entitled to claim about 20% of this interest cost, the "insurance" or "put protection" component of it.
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