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Splitting Assests after Divorce
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Share Market Outlook - Dec 1998
The Share Market - Where Now? (Aug 98)
Gearing into the Sharemarket
Negative Gearing:Shares Versus Property
New Approach to Negative Gearing
Putting Money into your Spouse's Super
Most experienced investors realise that over the longer term the
sharemarket outperforms all other major investment categories. On
average it performs better than the property market, the return on
Government bonds and of course, putting money in a bank account.
This makes sense. If the return from lending money to the Government
or to a bank was consistently higher than investing in productive
enterprises, the country would rather rapidly go down the shute. Over
the short term however, the sharemarket can undergo some rather
alarming swings.
The sharemarket does not move gradually higher or lower - it moves in
short, sharp bursts, either up or down. It can also stay stagnant for
long periods. These uncertainties are intensified if an investor
gears into the sharemarket. Using other people's money to rapidly
increase your own wealth is a time honoured practice in Australia and
elsewhere.
The principle is simple. An investor with $10,000 who borrows $90,000
only has to see a 10% rise in the share market for his capital to
double. Conversely of course, a 10% fall would see the entire capital
eliminated. But even with this sharemarket volatility, many financial
planners say borrowing to invest in the sharemarket is a better way
to go than borrowing to invest in the property market - the most
popular type of gearing exercise in this country.
They say the returns in the sharemarket are potentially better, the
tax advantages are higher and it costs a great deal less. The costs
involved in property transactions are many times higher than
sharemarket trading. The sharemarket also offers almost instant
liquidity compared with long delays in selling property. Just ask
anyone trying to sell property around the local area at the
moment.
One of the big advantages of sharemarket investing is the tax
advantage that comes with franked dividends. Fully franked dividends
are tax-paid to 30% which means that for people in the top income tax
bracket, the actual dividend received attracts only a small amount of
tax. Coupled with the tax deductibility of interest on the borrowed
funds, the net costs of borrowing into the sharemarket can be quite
small. For example, the after tax cost can be as little as $25 a week
for someone in the top tax bracket who borrows $100,000 at 10%.
Any investor can set up their own geared share investment or they can
arrange it through an institution. They can take out a personal loan
or borrow against their home or other asset. Alternatively, there are
a number of companies that lend specifically for share investments.
Some, such as Bankers Trust and share broker Ord Minnett, will lend
up to 70% of the value of an approved share portfolio. The interest
rates are competitive and generally are a little above the bank bill
rate. Interest can be pre-paid up to 12 months in advance so that
maximum advantage can be taken of the tax deduction.
Advance Bank has recently introduced a product that allows regular
investing and borrowing into the sharemarket. This is more like a
geared savings plan. Macquarie Bank has a guaranteed sharemarket
gearing product that involves borrowing all the money for the share
investments with complete protection of capital. You select the
shares (from a list approved of by Macquarie) and if the share price
falls after purchase then the shares can be returned in complete
settlement of the loan. The price of this riskless product comes in
the form of higher interest rates (currently around 16%).
In general, geared sharemarket investing is suitable for those who
are comfortable with the volatility of the sharemarket, who are in
the top tax bracket and who are prepared to stay with the investment
for five years.
THE COST OF SHAREMARKET GEARING*
Dividends $ 5,000
Less Interest $10,000
Pre-tax cost $ 5,000
Tax Analysis:
Tax savings on interest $ 4,840
Less net tax on dividends $ 1,149
Net tax savings $ 3,691
Cash Outflow:
Interest $10,000
Less dividends $ 5,000
Less tax savings $ 3,691
Net cash outflow $ 1,309
Weekly cash outflow $25
* The yearly after tax cost of borrowing $100,000 at 10% and
investing in fully franked shares with a dividend yield of 5%
(highest marginal tax payer). Company tax rate 33%.
(Tax is $3,611 on gross dividend of $7,462 less tax credit of $2,462
= $1,149)
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