Ask Noel: Franking credits and capital losses

I am a director of the trustee of a charitable foundation. The trustee invests in listed shares, mainly LICs and applies to the Australian Taxation Office for the refund of franking credits, as the fund is exempt from income tax. It appears that the foundation could be another victim of Labor’s tax grab. Can you please clarify.

I have been advised that charities will be in the same position as pensioners – they will be exempt from the proposed rules.

Labor’s proposal if it gets into power is to disallow the payment of cash for franking credits to investors who do not pay income tax. This is of concern. However, I have heard that there is the possibility that existing securities could be grandfathered until they are replaced over the next seven years. What does that mean?

I have not heard of this proposal, but I suppose it would mean that investors would be able to claim excess franking credits on existing shares but not ones that had been more recently purchased. I cannot imagine it being legislated in view of the immense complexity it would cause.

I have a home with a large loan and an investment property portfolio of three residential properties. An investment property was recently sold with a large loss and has a residual loan due to negative equity. Investment property B will soon be sold for a large gain. Both sales will occur in the current financial year. Overall the total capital gain/loss from those two sales is negligible. Investment property C will be held long term and has no mortgage. All properties are cross collateralised by my single lender. Can I transfer debt/loans from investment properties A and B to investment property C which will be held long term? Can I use the full sale proceeds from the sale of investment property B to pay down my home loan?

You cannot rewrite history, interest on a loan is only tax deductible if the borrowed money is used to produce income. It does not matter where the loan is secured, it is all about tracing how the money is spent.

If you are seeking tax deductibility, an option may be to sell the third property, and then re-borrow for another investment property. The interest on this last mentioned loan would be wholly deductible.

Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. His advice is general in nature. Readers should seek their own professional advice before making decisions. Twitter: @noelwhittaker