Now is the time for tax planning MONEY MATTERS MONDAY 7TH MAY 2018
Borrow to Invest and Save Tax
With the end of the financial year now only about seven weeks away now is the time to plan tax deductions so as to reduce tax and maybe earn a refund for this financial year. Making superannuation contributions is one option that now allows working people including employees to claim tax deductions.
Another option is to prepay legitimate tax-deductible expenses. The Tax Office allows people to prepay expenses for up to 13 months so costs for the next year can be paid in June and the tax deduction claimed in this year’s tax return.
One expense that has potential for large tax deductions for many people including employees is interest on investment loans. If money is borrowed for investment purposes the interest on the loan is usually tax deductible.
Borrowing to invest can work well for younger people with good incomes and job security. If they plan carefully and buy good quality investments they can make profits on someone else‘s money.
Carefully selected properties bought with borrowings at sensible prices in desirable locations can provide healthy income and capital gains. Lenders are keen to lend against residential and commercial property.
Borrowing to invest in professionally managed funds can make good sense for some people. Buying shares directly can also work well but is a higher risk approach. Managed funds buy shares in many companies to spread the risk.
Some funds also invest in overseas shares, commercial property and infrastructure, or a mix of all asset types, also with the aim of reducing the fluctuations.
Investment loans can be drawn from several sources. Loans secured by property have lower interest costs, perhaps home loan rates.
Margin loans are suitable for people without property to borrow against. They use only the new investments in funds and shares as the security. A deposit of around 30 per cent is required. Interest rates are currently 6 to 6.5 per cent per annum for the next 12 months in advance.
This is higher than home loans, and the lender will track the values of the new investments to ensure they aren’t left exposed by a fall in prices. Despite these disadvantages margin loans can still produce strong returns.
They also have the advantage that the initial borrowing can be quite small with increases easily made whenever the investor wishes. For people with good incomes but little savings margin loans offer instalment gearing.
A monthly savings contribution is matched by a similar borrowed amount each month to build the portfolio value. Tax deductions are available to reduce this year’s tax. Now is the time to plan.
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