The potential tax advantages of geared investing are well known among advisers and investors. As we approach the end of the financial year, there may be opportunities to take advantage of some of these potential tax benefits by fixing the margin loan interest rate and prepaying interest. Some of the advantages of this strategy include:
- Prepaying the interest for the next 12 months could potentially bring forward the tax deduction to this financial year.
- Existing investors with a margin loan on a variable interest rate may be able to effectively claim up to 24 months worth of interest payments as a tax deduction in this financial year.
The non-tax benefits of fixing an interest rate and prepaying the interest costs include:
- A fixed interest rate provides interest cost certainty and can assist with cash flow management.
- Depending on your long term view for interest rates, you may be able to lock in a competitive rate.
Gearing also allows investors to increase the size of their portfolio. Not only can this maximise long term capital gains, but it can also increase regular distribution payments, many of which incorporate franking credits. To illustrate how franking credits can reduce an investor’s tax burden, consider an investor on the 39.5% marginal tax rate (includes 1.50% Medicare levy) who receives a distribution that is 100% franked. After taking into account their franking credits, the investor will only pay an effective cash tax rate of 14% on the cash distribution received.
The combination of tax effectiveness, flexibility and an ability to increase an investor’s exposure to growth assets means that gearing will continue to complement and enhance long term investment strategies.
For more information about fixed interest rates, prepayment of interest costs, risks and the potential tax benefits of gearing, please contact your financial adviser.
Important Information
Colonial Margin Loan is one of the products under the Colonial Geared Investments brand which are provided by the Commonwealth Bank of Australia ABN 48 123 123 124, administered by its wholly owned subsidiary Commonwealth Securities Limited ABN 60 067 254 399. This information (including the statements on taxation which are of a general nature only and based on current laws, rulings and their interpretation – which may change) has been prepared without taking account your objectives, financial situation or needs. Because of that, before acting on this information you should consider the appropriateness of it, having regard to your objectives, financial situation and needs. You should also speak to your financial/tax adviser. This information is for illustrative purposes only and is not a recommendation in regard to any content. Past performance is not a reliable indicator of future performance. Applications are subject to Commonwealth Bank’s normal credit approval. Please consider the full terms and conditions are available at www.colonialgearedinvestments.com.au before making any decisions. Bank and Government charges apply. Only investors who fully understand the risks associated with gearing into investments should apply.