Negative gearing is arguably the most generous tax break available to Australian property investors.

Whether you’re an established property investor or contemplating purchasing your first investment property, you may care to familiarise yourself with the way that negative gearing works.

A property is considered to be negatively geared if the owner has taken on debt in order to acquire it and the net rental income is less than the costs of maintaining the property (including the interest paid on the loan).

Investors with negatively geared properties are able to claim the shortfall between their associated costs and rental income as a deduction against their total taxable income.
In the event that your taxable income is insufficient to absorb the difference, then the remaining deduction can be carried forward to the next financial year.

Many Australians would not be able to enter the real estate market without taking on some form of debt. While taking on debt allows you to make investments that would otherwise have been beyond your reach, it also ramps up your risk profile because you will have a greater amount invested. Furthermore, if your investment property is underperforming, you remain responsible for making loan repayments.

Obviously, it is preferable to have an investment property that is positively geared, meaning that rental income covers loan repayments, interest and routine maintenance. Paying tax on a profit is typically considered to be a better option than minimising your tax liability while making a loss. Investors who have long term negatively geared properties are generally hoping to incur long term profits from capital growth.

Even if you think that your investment property will be positively geared, understanding the benefits of negative gearing can give you a little peace of mind. You know that if the property does lose money, you will be able to offset the loss against your taxable income.

When a property is positively geared, the income earned is added to your total taxable income. As such, it is taxed at your marginal tax rate. The same applies to any capital gain that you make from selling a property.

Our team of accountants are at hand to help with any questions you may have in relation to negative gearing and property investment.

Call (02) 4926 2300 or email us.

To discuss negative gearing for property investors call Leenane Templeton.

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The Australian dollar has been accused of inflicting all sorts of economic ills as it traded above US$1 for most of the past three years.

People would be forgiven then for thinking that the dollar’s drop from its post-float record high of US$1.10 in 2011 to below 90 US cents will be a big relief. Alas, it’s not so simple. As with most things economic, there are pluses and minuses whatever the value of the Australian dollar. Those who whinged about the “overvalued” Australian dollar crushing exports overlooked its benefits. They may well be the ones who moan loudest about a falling dollar. One upshot of a declining dollar is that it reinforces one of the most basic principles of investing – diversifying.

There are two main benefits of a mighty dollar. The first is that a higher currency, in effect, means that every Australian has had a pay rise. For a stronger dollar allows us to buy more imports. This is the mechanism by which all Australians benefited from the mining boom. The second benefit is that a rising currency reduces inflationary pressures as the prices of imports decline in Australian dollars. That allows the Reserve Bank of Australia to set interest rates at a lower level than otherwise.

In theory, a lower dollar helps Australian exporters (and adds to output) because our goods are cheaper for foreigners. This is the break exporters have been pleading for, even if in practice exporting is more complicated than just hoping the currency drops a bit.

We may not want our dollar to fall too far too fast, however, as side effects emerge. These disadvantages are, in fact, the opposite of the advantages of a rising dollar. Inflation could emerge as a threat if the dollar slumps too much. That would mean higher interest rates. Ouch for those with home loans. Some businesses might scrap plans to invest, thus lowering employment prospects.

Bad as that might be for many, the big hit for all of us from a lower dollar is that we have effectively just had a pay cut as import prices go up.

This hit to living standards from a declining Australian dollar forms one of the most basic cases for why Australians should invest in foreign assets such as equities. If your portfolio only holds Australian assets, your ability to purchase imports drops in line with the dollar’s decline. If you own some foreign assets, however, the value of these foreign investments rises in Australian-dollar terms when our dollar drops. This mechanism compensates, to some extent, for your reduced ability to buy imports. In more technical terms, it’s called diversifying currency risk.

Our award winning and professional team are at hand to discuss any financial planning and economy questions you may have.
Call (02) 4926 2300 or email us.

Disclaimer

If you wish to discuss the benefits of a low and high Australian dollar further, please do not hesitate to contact Leenane Templeton.

Financial information comes from Bloomberg unless stated otherwise.
Source: Fidelity, May 2014

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Investors may be interested in borrowing in a self managed super fund (SMSF) to invest within a residential property. However, investors need to be wary as this is not always the most financially effective way to buy property.

Self managed super has grown from a specialised strategy into a massive market comprising about one-third of the nation’s superannuation savings.

This can be attributed to a number of factors, including to marketing hype and expectations of continuing low interest rates fuelling demand for property. As the popularity of buying property through SMSFs grows, so too does the need for awareness and understanding.

It is essential that investors fully understand the benefits and consequences of borrowing to own a property in a SMSF compared to owning it in their own right.

Generally speaking, investors who pay the top marginal tax rate could be better off with a personal loan after set-up costs, management fees, and capital gains tax are deducted from the gross gains.

Buying a residential property through a SMSF carries additional responsibilities such as the fund’s trustees only being allowed to rent to tenants under “arms length” arrangements. Also, any rise in interest rates, falls in property value or overpriced properties would eat away at the profits.

Even negative gearing, which allows property investors to deduct interest costs against other income sources, may not be enough to offset the SMSFs higher legal and borrowing costs.

Call our team to discuss SMSF and property investment today!

Source: Leenane Templeton Chartered Accountants & Business Advisors – End Of Year Update

Disclaimer

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The new financial year is a perfect time to make some resolutions to improve your financial health. If you create simple and easy-to-follow resolutions you will be more likely to succeed. To start, you can ask yourself the following questions:
• What do I really want to change?
• What are the benefits of making changes?
• What steps do I need to take to make changes?
• What will stop me from making positive changes?
• Are my changes realistic and long term?

This article lists some simple, easy-to implement resolutions you could take on for the new financial year.

Keep your receipts

The most common reason people don’t take advantage of tax deductions when they file their tax return is simply because they don’t keep receipts. While keeping receipts for big ticket items is necessary, you don’t always need a receipt for the smaller items such as stationery and books.

Create a budget

Achieving your financial goals doesn’t have to be daunting; a good way to start is with a budget. Try to keep a diary of your expenses and your spending. This will enable you to track where your money is going and how much spare cash you can use to either attack your debt or build investments.

Cut your spending

Look at cutting unnecessary expenses. This could be as easy as making your lunch or coffee at home, cutting out optional extras such as lottery tickets or taking public transport instead of driving.

Pay extra

Try paying more than the minimum off your debts. Whether it’s personal loans or credit cards, paying the minimum will hardly make a dent as you will only be paying off the interest.

Increase your savings

Set aside a little bit of extra money each day, week or month. If you can save just $10 a day, you will have an extra $3,650 at the end of the year. You can talk to your employer about getting it automatically deducted from your pay – if you don’t see it you are less likely to miss it.

Contribute to your super

Think of the long term and your lifestyle when you retire. One way to increase your retirement savings is through salary sacrificing some of your pre-tax salary.
This will not only help to increase your super savings but could also reduce the amount of tax you pay.

Seek professional advice

Your financial adviser will help you keep to your resolutions and make sure your financial strategy is appropriate for the year ahead.

Contact the Team at Leenane Templeton to discuss your financial position and goals. Please call (02) 4926 2300. Like us on facebook and keep an eye out for blogs, events and workplace culture.

Source: IOOF, May 2013

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