Deductible vs Non-Deductible Debt
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.
- 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