With only three months remaining until the end of the financial year it’s a good time to start planning strategies to reduce tax for this year. The Tax Office allows people to prepay expenses that relate to next year’s income and claim the deduction in this financial year.

One strategy that was popular for many years, especially when interest rates were lower, is investment gearing. This involves borrowing to invest. The interest on the loan for the next twelve months can be pre-paid in this financial year and the deduction claimed for it now.

Investment markets have been uncertain and choppy since Covid, with modest returns. Gearing hasn’t been rewarding though the recent strong share market gains have improved the picture. Higher borrowing costs since 2022 have also been a big turn-off.

However capital gains and total returns from property and shares increase when inflation is high, even though interest rates rise. That was well demonstrated in the past, especially from the mid-1970’s to the mid-1990’s. The last two years also saw gains in house prices despite the higher borrowing costs.

So, for people keen to accumulate wealth, borrowing to buy a property or shares, or funds investing in them, is well worth another look now. Interest rates and borrowing costs should start to fall late this year and through 2025 which will help.

Margin loans use the new investments purchased as the security for the loan. A deposit must be paid and up to seventy per cent can be borrowed. The interest rates are high, currently around 9 per cent fixed for twelve months, or 10 per cent variable rate that will come down as rates fall.

The net cost after the benefit of the tax deduction could be around 6 per cent, depending on personal marginal tax rates. That’s not so bad and could make a margin loan investment plan worth taking up. Share and property funds are likely to earn more than that.

Lower borrowing rates are available if the investment loan is taken against a property. Home loan rates are around 6.5 per cent. After the tax deduction the net cost is around 4.5 per cent. That could be quite attractive for many people depending on their circumstances.

It takes time to select an investment property and negotiate and finalise a purchase. It takes time to get a loan approved, whether buying a property, shares or managed funds, so planning now makes sense.

Managed funds and shares can be purchased in smaller parcels than an investment property, and amounts can be increased or reduced easily at any time. Gearing plans are best prepared with financial advice.