The Mysteries Of Negative Gearing 2 12 08

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The Mysteries Of Negative Gearing 2 12 08

  1. 1. The Mysteries of Negative Gearing<br />Negative gearing is a legitimate tax planning strategy but it is not for everyone.<br />Derek Miles<br />www.financialmilestones.com.au <br />
  2. 2. What can you negative gear ?<br />Property – the most common and well known<br />Shares or managed funds (margin loans)<br />Business assets<br />Managed Investment Schemes – agriculture or forestry<br />
  3. 3. What is Negative Gearing ?<br />It is the offsetting of the difference between investment income and the expenses incurred in holding these investments, against other ordinary income such as PAYG income and thereby benefiting from a tax refund of PAYG tax already paid. <br />
  4. 4. An example of negative gearing<br />Tax Payable<br />(incl Medicare L)<br />Taxable income 85,000 $21,875<br />Gross rental income 18,200<br />Less expenses:-<br />Interest on loan (8%pa) 28,000<br />Rates 2,400<br />Agents fees 1,500<br />Maintenance 3,000<br />Borrowing Costs 800<br />Building Allowance 6,250<br />Depreciation 5,600<br />Other 1,000<br />Total Expenses 48,550<br />Rental Loss 30,350<br />New Taxable Income 54,650$11,815<br />
  5. 5. What is the cash flow consequence ?<br />Inflows:- <br /> Gross rental income 18,200<br /> Refund 10,060<br /> 28,260<br />Outflows:-<br /> Interest on loan (8%pa) 28,000<br /> Rates 2,400<br /> Agents fees 1,500<br /> Maintenance 3,000<br /> Other 1,000<br />35,900<br />Negative Cash Flow $7,640<br />Non Cash Items (but tax deductible)<br /> Borrowing Costs 800<br /> Building Allowance 6,250<br /> Depreciation 5,600<br />
  6. 6. Misconceptions 1<br />You must have paid PAYG for the cash flow to work (for business clients it is a reduction of tax payable so they still need to have the cash flow to support the negatively geared investment).<br />You cannot purchase investment after investment – you must have the cash flow from other income to support the negative gearing and there is a limit.<br />You purchase an investment that requires a larger loan than you can afford.<br />What if the investments stop earning – can you support the debt?<br />Negative gearing is not as attractive for lower incomes. It works best with the highest tax bracket.<br />
  7. 7. Misconceptions 2<br />Negative gearing is prone to hiding poor investment assets (mistrust investments sold with negative gearing as the dominant motive).<br />The investment assets must have a reasonable basis of return.<br />You cannot negatively gear effectively in a trust or company (losses cannot be transferred against personal incomes.<br />Changing your home to a negative gearing asset is ineffective – you cannot transfer debt (further explanation).<br />
  8. 8. Who’s advice should you seek ?<br />Your Accountant – Tax Advice – Cash flow analysis.<br />Your Financial Planner – investment advice/affordability<br />Your Mortgage Broker – most effective borrowings<br />Quantity Surveyor – cost analysis of the depreciable items that are deductible<br />
  9. 9. What do we offer ?<br />Tax & Accounting Advisors offers professional accounting services including:<br /><ul><li>Preparation of financial accounts and tax returns
  10. 10. Free ELS lodgment
  11. 11. Setting up books of accounts and designing business systems
  12. 12. Preparing borrowing proposals and advising on best financing methods
  13. 13. Tax return and financial accounts preparation
  14. 14. Company registers and statutory matters
  15. 15. Preparing income, expenses, capital and cash flow budgets
  16. 16. Tax minimisation and associated tax planning strategies
  17. 17. Assisting with tax audits
  18. 18. Computer comparisons on financing decisions
  19. 19. Analysis for businesses so that they make a profit and keep it
  20. 20. Structured business coaching including development of business plans and business strategy development</li></ul>Phone :- 07 3396 7757<br />Mobile:- 0411 865 695<br />Email:- derek@financialmilestones.com.au<br />Web:- www.financialmilestones.com.au<br />Address:- 2/71 Edith Street, Wynnum<br />

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