Pre-paying interest can cut tax

Investors are moving to implement tax-effective strategies as June 30 approaches, including the pre-payment of interest on margin loans.

This allows investors to claim cash-refundable franking credits on their tax refund and possibly reduce capital gains tax. Margin loans can provide 50-70 per cent of the purchase price of shares or managed funds.

Borrowers are able to pre-pay their interest and claim this as a tax deduction – depending on their personal circumstances. But interest paid is not refundable, so investors can’t take out a loan, prepay interest, get the deduction and then try and cancel the loan and get their interest back.

As a tax strategy, margin loans and prepaying interest are only beneficial if you plan on actually investing the funds.

Leveraged Equities estimates that up to 40 per cent of borrowers are pre-paying their interest. They are receiving a discount on the current variable rate, and this is attractive as they can avoid the potential interest rate rises for the pre-paid period, says Berge Der Sarkissan, MD of Leverage Equities.