UNDERSTANDING NEGATIVE GEARING. Negative gearing What is it? Why do we use it? How do we use it? ...

UNDERSTANDING NEGATIVE GEARING

Negative gearing

What is it?

Why do we use it?

How do we use it?

When do we use it?

Definition

The gearing (borrowing for) of an investment whereby the expenditure exceeds the income.

This negative income reduces the normal taxable income and therefore provides a tax rebate.

The tax rebate is then used to help finance the interest costs of the investment.

The Purpose

Tax rebating (valid way to reduce taxable income).

Someone else helps to make your repayments!

A popular way to create wealth.

When is it used?

Best utilised when income exceeds $50k pa.

Or when the owner occupied residence is paid off.

(Ownership of your own home still remains the best tax effective investment).

To create wealth for retirement income.

Provide an asset for children.

Ways To Borrow

Any way a lender will loan to you.

However it is important to know that it is only the Interest Portion of a repayment that is Tax Deductible.

Most investors borrow interest only and ‘generally’ for a fixed term to obtain maximum tax benefits and insure against interest rate volatility.

However, if it is a pure ‘asset accumulation’ exercise, borrowers may take advantage of variable rate loan reduction programmes.

Split (fixed / variable rate) facilities also provide good insurance as well as providing flexibility.

The Mechanics

Income $60,000

Tax $16,480

Nett $43,520

Income $60,000

Rent $9,360

Int/Costs $15,000

Tax. Income $54,360

Tax $14,027

Tax Refund $2,453

Total cost $15,000

Rent $9,360

Tax refund $2,453

Borrower $3,187

Total $15,000

Weekly cost to borrower $61

Tenant63%

Borrower21%

Tax Refund16%

The Percentages

Does it have to be negative?

No!

You can gear neutrally.

(Which means that the borrowing is structured so that the income is equal to the outgoings.)

You can gear positively.

(Which means the income exceeds the outgoings providing extra income.)

Pitfalls…how to avoid them!

Liquidity

Unemployment

Sickness/Death

Bad tenants

Distrustful tenants

Have a ‘buffer’ fund and use the 221d tax adjustment (Insurance also)

Adequate Insurances in place

Find a good Managing Agent

Insurance policy +above

Be Sure

We strongly recommend that you receive independent advice from their financial adviser or Accountant.

We’ll come along with you if you wish.

That’s all for now folks!

We will be very happy to complete your own personal analysis.