Key points to keep in mind that even if a portfolio is not negatively geared, interest on the investment loan is tax-deductible – and the investor is getting exposure to the sharemarket when shares are still relatively cheap.
Gear property
If you believe that prices are beginning to bottom-out in your selected market, now might be a good time to begin thinking about gearing a residential property investment over the next few months or so.
As reported by Property Observer, RP Data-Rismark calculates that the indicative rental yield for all-capital houses was 4.4% in January. This compares to an average variable rate of 6.99% charged by the four big banks for what interest-rate researcher Canstar regards as “outstanding value” property investment loans.
Louis Christopher, managing director of SQM Research, believes another rate cut would be necessary to mark the bottom of the Sydney and Melbourne markets where auction clearances are lower than last year’s levels. However, he suspects that the Perth residential market has either bottomed or is near to it.
In all, Christopher says it is “not a bad time” for investors to begin researching for their next residential investment.
Gear through a SMSF
Sydney tax lawyer Robert Richards says gearing an investment through a self-managed super fund (SMSF) is a way to expand a fund’s assets despite the looming cut to the standard concessional contributions cap for members over 50.
Under superannuation law, SMSFs can borrow to invest subject to strict provisions. The geared asset must be held in a special trust until the final payment of the loan, and lenders cannot make a claim against any other fund assets in the event of a default.
There is plenty to consider. On one side, an SMSF-held asset will produce much lower negative-gearing tax benefits than if the asset was in the name of a top marginal taxpayer.
But once the investment’s income exceeds the interest debt, the rental income is taxed at a maximum of 15%. And the eventual capital gains are taxed at just 10% (if the asset is not sold within 12 months of purchase) or CGT-free if sold when the asset is backing the payment of a superannuation pension.
Finally, no investor should gear an investment without being aware of the risks. As Richards says: “While gearing increases the opportunity for greater capital gains, it also exposes you to greater capital losses”.
NEXT MONTH: SmartCompany will publish its annual end-of-year tax guide written especially for SME owners. Our guide this year will include further strategies to prepare for the possible cutting of your concessional contributions cap, which includes deductible contributions by the self-employed.
Andrew Sadauskas is a former journalist at SmartCompany and a former editor of TechCompany.
