The gears are turning
You have most likely heard people in your lunchroom at work talk about negative gearing. But have you asked them to take the conversation beyond that?
Some of the main points worth considering when contemplating a gearing strategy are:
- Gearing as a debt recycling and investment strategy by utilising current equity: Gearing as a debt recycling and investment strategy can be achieved concurrently by replacing non-deductible debt with deductible or taxeffective debt. Gearing has the potential to multiply gains as well potentially magnify losses.
There are 3 types of gearing strategies:
- negative,
- neutral and
- positive gearing.
A gearing strategy can fluctuate between all types of gearing at different points of time; therefore, tax minimisation should not be the main objective behind a gearing strategy.
- Utilising a margin lending facility: The geared asset is held as security for a margin lending facility. When utilising margin lending, appropriate levels of liquid funds are necessary in the event of a margin call or a downturn in the market. Falling below the prescribed LVR will result in a margin call, if its over and above a percentage which has been set as a ‘buffer’.
- Gearing into equities as opposed to property: Generally, gearing strategies are limited to income producing assets with the potential for capital growth, such as equities or property. There are many tax advantages associated with gearing into equities; particularly imputation credits which can offset the tax payable on other income.
Among some of the concerns, which should be considered for a successful gearing rare the requirement for long-term commitment, high quality assets, a regular and secure income stream and an appropriate investor risk profile.
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Dan Smith is a self employed Financial Planner based in Rockhampton. He has clients in various locations throughout Australia but predominately in Central Queensland and specifically the geographic area encompassed by the Rockhampton Regional Council.