say I drew down $23k of equity which at 7.4% costs an extra $1702 of interest say I borrowed another $23k of margin loan at 8% costing $1840 interest. would the $3542 of interest effectively reduce my taxable income by 3542? say I'm earning $55k a year how much would I get back in tax just for the above deductable interest? witht the above example, if navra had a flat year and only got 10% return it looks like I would only make about $1058 net profit (not including tax) would the tax return make it more worthwhile?
You don't mention what you are using the borrowings for - we wouldn't want to assume that you are using them for investment purposes without you explcitly stating so ?
Yes the interest expense reduces your taxable income by this amount. But you are still out of pocket by 30 cents in the dollar on a 30% marginal tax rate. I reckon you are really asking a question about the viability of geared investments during times of low returns ? I cannot answer that one for you as it depends on your circumstances & strategy. Cheers, Rob
and I would also pay 30 cents in the dolloar on the income from navra as well I take it? Circumstance: Currently buying a house worth 200k that has 167k owing on it. Dual income family both on approx 50k. As from jan/feb 2008 I will debt free apart from the mortgage. Strategy: I would like to follow the living on equity articles from this website. what step next?
That is a question for the financial planners. I'll just emphasise a bit of GENERAL tax: At 30% rate you will pay tax on distributions at 30 cents in the dollar, unless you receive franking credits. You will not pay tax on unrealised capital gains and yet your wealth is increasing ! CGT may apply when sold though. You will get a tax deduction on your borrowings to purchase your investments, meaning interest effectively costs 70 cents per dollar. This is the 'tax shield' of deductible debt - but it still costs ! If you wish to borrow against the security of your home, then provided the loan is used to gain your assessable income (e.g. purchase investments that pays dividends) then this borrowing is deductible. There are some good articles on the ATO website on basic taxation for investors. However, while structuring your affairs tax efficiently will improve your returns, you really need to talk to a financial planner about the whole investment exercise. No amount of tax breaks will turn a bad investment into a good one. Rob