Forward Thinking – Tax Effective Gearing

Yet another financial year has rolled around, however the need to create tax effective strategies for the upcoming year never dwindles. We’re now starting to think of clever financial strategies to decrease our next tax bill, and the possibilities for such are endless!

The arguments in favour of borrowing investment funds are numerous, and Financial Advisers claim the benefits of gearing strategies can, in appropriate circumstances, offer immeasurable value to investors.

This advice is based on two premises. Firstly, in that it offers clients the ability to make that initial investment, and secondly, the potential tax savings in pre-paying interest are considerably persuasive!

As one expects, the interest paid on an investment loan can (in most circumstances), be claimed as a tax deduction. Whilst this serves as one incentive to gear investments, the notion of pre-payment of interest offers an even greater tax saving. Consider taking out a fixed interest loan before June 30, and pre-paying the interest for up to twelve months. Effectively, this brings forward the expense of what could be claimed as a tax deduction the following year, and can be used to reduce the taxable income declared in the financial year of the purchase.

For example, imagine earning an annual salary of $70,000 p.a. and taking on a fixed rate investment loan for $100,000 before June 30. If the interest rate is 7% p.a. and the $7,000 is paid upfront and claimed as a tax deduction; your taxable income would equate to $63,000 p.a. Naturally, this results in less tax payable - and a pleasant reduction to that overall tax bill!

Naturally, this strategy won’t be suitable to everyone. However, under the right circumstances, taking advantage of a strategy such as tax effective gearing may offer some convincing tax efficiencies. As to be expected, the success of such a strategy will largely depend on the relevant loan type, the asset class or investment type, and the level of insurance that is available.

If this strategy sounds like an area of interest to you, our certified Financial Planner can assess your situation and this strategy’s suitability. Please contact Jason Abrahams or Stefanie Coleman on (02) 9438 3233 to schedule an appointment.