Plan 2 Prosper

The difference between deductible and non-deductible debt lies in the after tax cost. Non-deductible debt and interest costs are repaid with after tax income, while deductible debt reduces assessable income and provides a tax benefit. Debt generally becomes deductible when the purpose of the funds is to produce assessable income.

Let’s consider a loan of 11% in the 2010/11 Financial Year. If the loan is used for private purposes, for example a boat or a car, the cost is 11%. However, paying 11% for a finance facility that is used for investment purposes, eg shares, would reduce the cost of the facility according to the following formula:

I x (1-MTR)

Where:

•      I = interest rate

•      MTR = marginal tax rate

At the top marginal tax rate (45% plus 1.5% Medicare levy), the actual cost of the finance would fall to:
0.11 x 0.535 = 5.885%.

Marginal tax rate for $80,001 – $180,000 of 38.5% (37% plus 1.5% Medicare levy), the actual cost of the finance would fall to:
0.11 x 0.615 = 6.765%.

Marginal tax rate for $37,001 – $80,000 of 31.5% (30% plus 1.5% Medicare levy), the actual cost of the finance would fall to:
0.11 x 0.685 = 7.535%.

Marginal tax rate for $6,001 – 35,000 of 16.5% (15% plus 1.5% Medicare levy), the actual cost of the finance would fall to:
0.11 x 0.835 = 9.185%.

Where to from here?

If you would like to discuss the topics raised or if you would like more information, speak to your financial adviser or contact Dan Smith of Plan 2 Prosper on 07 49265 570.

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Dan Smith is self employed and is for many families their trusted 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.

This information is intended to only provide you with general information and, while the sources for the material are considered reliable, no responsibility is accepted for any inaccuracies, errors or omissions. Before making a decision based on this information, you must consider its appropriateness having regard to your objectives, financial situation and needs. We recommend you obtain professional financial advice specific to your circumstances.

Dan Smith and  Dancin Pty Ltd ABN 71 531 338 371 trading as Plan 2 Prosper are Authorised Representatives of GWM Adviser Services Limited ABN 96 002 071 749 trading as MLC Financial Planning, an Australian Financial Services Licensee, with its Registered Office at 105 – 153 Miller St, North Sydney NSW 2060

During a recent discussion with a client we explored some ratio’s which helped them to analyse the risk associated with their investment property. These ratio’s were similar to those used to analyse the inherent risk of other investments.

One specific ratio I thought was worth sharing was the “break even point”. The break even point is where the income from the property covers the total expenses of the property including interest payments. It is designed to calculate the liquidity and risk associated with the property. The formula is as follows:

Break Even Point = (operating expenses + interest only debt repayment) divided by Gross Possible Income.

Example:

• A property has operating expenses of $10,000, interest only debt repayments of $16,000 and an expected income of $27,000
• BE = (10,000 + 16,000)/27,000
  BE = 0.96

For a positively geared property the ratio will be less than 1 and should reduce over time. For a negatively geared property the ratio will be greater than 1.

Where to from here?

If you would like to discuss this topic or if you would like more information, speak to your financial adviser or contact Dan Smith of Plan 2 Prosper on 07 49265 570.

• Contact us
• Get more information about an Educational Forum for you and your friends
• Register and receive regular email updates

Dan Smith is self employed and is for many families their trusted 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.

This information is intended to only provide you with general information and, while the sources for the material are considered reliable, no responsibility is accepted for any inaccuracies, errors or omissions. Before making a decision based on this information, you must consider its appropriateness having regard to your objectives, financial situation and needs. We recommend you obtain professional financial advice specific to your circumstances.

Dan Smith and  Dancin Pty Ltd ABN 71 531 338 371 trading as Plan 2 Prosper are Authorised Representatives of GWM Adviser Services Limited ABN 96 002 071 749 trading as MLC Financial Planning, an Australian Financial Services Licensee, with its Registered Office at 105 – 153 Miller St, North Sydney NSW 2060

There are tens of thousands of potential investments available. They can be grouped based on their similarities into “asset classes”. MLC have produced a concise blurb regarding the 3 main groupings of asset classes – shares, property & debt securities.

Find it at this link .

Naturally enough each of these 3 groups can be split into narrower and narrower groups based upon a nearly infinite categorisation scale. Extra grouping is good for the experts but for us common folk it’s somewhat unneccessary to complicate things even further.

Think of a buying a pet fish, dog or cat. There are lots of different types of fish, cats and dogs to consider but when you have made your purchase, it’s still likely to be called either a fish, cat or a dog.

Learn enough to find out what you need to know and recognise what you don’t. When you don’t know something and feel you need to learn more, seek advice from someone who is in a position to help you better understand.

Where to from here?

If you would like more information, speak to your financial adviser or contact Dan Smith of Plan 2 Prosper on 07 49265570.

• Contact us
• Get more information about an Educational Forum for you and your friends
• Register and receive regular email updates

Dan Smith is self employed and is for many families their trusted 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.

This information is intended to only provide you with general information and, while the sources for the material are considered reliable, no responsibility is accepted for any inaccuracies, errors or omissions. Before making a decision based on this information, you must consider its appropriateness having regard to your objectives, financial situation and needs. We recommend you obtain professional financial advice specific to your circumstances.

Dan Smith and  Dancin Pty Ltd ABN 71 531 338 371 trading as Plan 2 Prosper are Authorised Representatives of GWM Adviser Services Limited ABN 96 002 071 749 trading as MLC Financial Planning, an Australian Financial Services Licensee, with its Registered Office at 105 – 153 Miller St, North Sydney NSW 2060