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

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.