7. Borrowing to invest
| Clients |
Chris and Amanda, late 30s, 3 young children |
| Income |
Chris – Bank Executive - $130,000 p.a. |
| Assets |
Home - $500,000 – Unencumbered |
| Goal |
Improve long-term financial position. Currently have $50,000 available, and are interested in investment. |
| Solution |
After discussing their options with their financial adviser, Chris and Amanda opt to invest in a diversified mix of equities (Australian and International) and property.
Their initial investment of $50,000 is invested in Amanda’s name. As she is not earning any other income, this approach is tax effective. They will continue to build upon this amount as they save money in the future.
They also establish a line of credit against their house for an amount of $240,000. (The facility is secured against their house rather than investments, as the interest rate is approximately 2% per annum better). The borrowing and geared investments are in Chris’s name. Chris is in a higher marginal tax bracket and will benefit from the tax deductions associated with the interest on the borrowings.
Instead of investing all of the available funds in one tranche, Chris and Amanda decide the appropriate strategy for them is to invest progressively over the next ten years - $2,000 per month. This will ‘average’ the price they pay for any investments and remove any emotion or guesswork out of picking the right time to invest.
Chris and Amanda review their gearing strategy each year. Over the ten year plan period their total investments grow to in excess of $400,000. |
| Income |
No Super Contribution
|
With Super Contribution
|
|
Net Capital Gain1
|
$40,000
|
$40,000
|
|
Super Contribution (Deduction)2
|
(N/A)
|
($40,000)
|
|
Taxable income
|
$40,000
|
Nil
|
| Tax |
|
|
|
Income Tax (46.5%)
|
($18,600)
|
Nil
|
|
Contributions Tax (15.0%)
|
(N/A)
|
($6,000)
|
| Total Tax |
($18,600)
|
($6,000)
|
|
Net Tax Saving (Combined)
|
|
$12,600
|
1 Investment returns assumed at 8% per annum, including 3.2% pa dividend, 4.8% pa growth and 30% franking. Chris’s marginal tax rate of 40% plus Medicare Levy of 1.5% = 41.5%. No additional contributions are made by Chris and Amanda.
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