People with sound, reliable incomes who would like to increase their tax deductions and reduce their tax bills or earn a refund this financial year, can consider investment gearing. Once an investment loan is set up interest for the next year can be paid and a tax deduction claimed for it this year.
The tax deduction shouldn’t be the main aim. The investments must have strong prospects for success. They could be direct property, though it would now be difficult to settle a purchase by June 30, and residential property is probably fully priced after recent strong gains.
Managed funds and shares work well in geared investment plans. They can be purchased in smaller amounts than a house, say $100,000 or less.
An investment loan can be established by redrawing an existing loan against property or drawing money from an offset account. Investors can also arrange a new bank loan or margin loan. Margin loans use only the new investments as security and lend up to seventy per cent of the value.
Their interest rates are higher than property loans, currently around 5.5 per cent fixed for a year. It will take a little time to apply and get the loan approved but the investments can be arranged quickly and easily.
With the current surge in inflation and rising interest rates some may question whether it is a good time to invest. If investing for the long term the answer is definitely yes. The recent market weakness means buying now provides sound value.
Some investors may fear capital gains cannot co-exist with high inflation and interest rates. They can. Assets increase in value when inflation is high. They must. A house is always worth a house, even if inflation means we now need more dollars to buy it.
A BHP share is always worth a BHP share, even if inflation means we must pay more dollars for it. Australia had annual inflation of around ten per cent for most of the 1980’s. Asset prices shot up – houses, shares, businesses.
The All Ordinaries index was 500 on 2nd January 1980. It rose to 1681 by 31st December 1989, an increase of 2.4 times, almost 13 per cent per annum capital growth. Dividends were also paid so total returns were around 16 per cent per annum.
If buying shares it will be best to choose proven companies paying reliable dividends. They will be less affected by interest rate increases. Reinvesting dividends will maximise gains.
Managed funds offer many choices. Some specialise in Australian or international shares, commercial property or infrastructure. Diversified funds are a good option to reduce volatility. Long-term returns are a little lower but still attractive.