Hands off Negative Gearing
Only three Labor governments have won power from the Opposition: Whitlam, Hawke and Rudd. None of them got elected with a platform of new or increased taxes—Anthony Albanese knows that too well—so we can safely assume, regardless of the outcome of the next Federal Election, Negative Gearing is here to stay, even though people are still babbling on about it.
Negative Gearing is a form of financial leverage where an investor borrows money to buy an investment property and the cost of owning this property exceeds the rent it generates. This loss (which is sometimes built up with depreciation) can be offset against other income. So if I’m on an effective tax rate of 47% and have an investment property that makes an annual loss $10,000, I’ll save $4,700 in tax.
Tax payers do OK out of investors. Stamp Duty of around 4% applies at the time of purchase and a further 20% of the Capital Gain comes back into the public purse when it gets sold. So if someone buys a property for $1M and sells it in 12 years for $2M, tax revenue of $240,000 has been generated. For serious investors, land tax might be another $8,000 per annum, which adds another $80,000 to the total tax that has pretty much arisen out of nothing. I think we investors pay our share, so any politician might well be advised to back off.
The funny thing is that this debate has taken place in an era of such low interest rates. Most properties are actually positively geared, and if not, soon become so as rents rise over time. An increased GST and some kind of death tax are what’s needed to repair our increasing deficit, but good luck to any politician who has the guts to say that out loud! There are also heaps of pensioners living in $10M houses, collecting $868 fortnightly weekly pension from us tax payers for decades, to maximise the tax-free $10M they can leave to their kids. Hmm. Maybe the family home won’t be excluded from the Assets Test forever, but again, it will need to be a deal done by both sides of the house behind closed doors, because it isn’t an election-winning strategy.
A dentist called me a month ago, as he was about to buy a property with his business partner.
Given we’re all locked down, I haven’t met him, but that’s OK, us brokers can work contactlessly. They certainly don’t need a broker—any bank ill throw the money at them—but, specialists understand specialists. They see my free service as a better option than relying on the 25-year-old in the bank (with all due respect to the emerging generation—experience counts).
Dr. Bill and Dr. Ted just bought a suburban property for $2,000,000 that they’re about to spend $300,000 on, to turn it into a surgery. I recommended they buy in a Unit Trust, just in case down the track one of them wants to buy the other out. Buying the other’s shares won’t incur stamp duty. Also when they pay down the loan in the future, their Self-Managed Super Funds can slowly eat into the ownership, buying the shares off their respective (discretionary) Family Trusts who are the current shareholders. Again, no stamp duty.
But for now, they took my advice and borrowed the full cost, being the $2M, the stamp duty of $80,000, and the $300,000 they’re going to use to renovate it—and even their professional fees of $4,000. I arranged a joint loan for $1,800,000 against the place at the Commonwealth Bank, on an interest-only basis at 2.39% pa. I also established a $290,000 equity loan for each of them, secured by their respective homes, at their existing banks. Maximising negative gearing is all about borrowing the lot where it’s deductible—and if you don’t need it all, just park the extra bit in the offset account attached to the variable loan portion.
Dr Bill initially questioned me, saying that he already owns his home outright, thinking that because he doesn’t have any bad debt, he doesn’t need to be bothered with all that. But I explained to him what medical professionals generally do once they pay off their home loan—upgrade!—or, one day he might get into some non-deductible debt by buying a holiday house, helping out his adult kids or even making non-concessional contributions into Super. Either way, it doesn’t hurt to borrow the lot when it comes to good debt, even if you don’t need to, just in case. It’s a tax thing, which always works with the financially responsible high-end clients that iChoice attracts.
I look forward to financially representing Dr. Bill and Dr. Ted, as well as their siblings, their colleagues, and their adult kids for the next 14 years (until I retire). That’s how iChoice works, and I’m anticipating an excellent adventure.
Local boy Jason Khoury is an awarded mortgage broker who established iChoice some 13 years ago, when Westpac made him and his team redundant during the GFC. Jason encourages TWT readers to call him on 0400 900 300 to see what’s possible, while he’s locked down at home.