Manage your debt, don’t let it manage you

We all borrow money to buy things when we don’t have  the money to pay the full purchase price. Most people borrow to buy personal assets like a home but you can also borrow to access investment opportunities to help grow your wealth.

Not all debt is the same and it is important to understand how it works and consider the implications of particular strategies. While it can be a great tool to grow your wealth, if it is not carefully managed it can have the opposite effect.

WHICH LOANS SHOULD YOU REPAY FIRST?

The interest on loans to buy personal assets such as your home, car, lifestyle purchases or living expenses cannot be claimed as a tax deduction, so it makes sense to repay these debts as a priority.

Your credit card usually charges the highest rate of interest so you should aim to pay this debt off as quickly as possible while continuing to make the required repayments on your other loans.

If you currently make monthly repayments, one simple trick is to halve these amounts and pay them fortnightly instead. There are 26 fortnights in a year compared to 12 months so you will make additional repayments across the year and reduce your total interest cost and the loan term.

The fees to establish loans may depend on the type of loan. It is important to understand all the costs charged by the lender or government. This includes the cost of making extra or increased repayments and the cost of any restructuring.

If you have a Higher Education loan (HECS-HELP), this is at relatively low interest rates, so it can make sense to repay the minimum amounts on this while concentrating on repaying other loans.

BORROWING TO INVEST

If you borrow to buy an investment the interest cost and other expenses may be tax deductible. This applies to loans used to buy a rental property, shares or managed funds.
If the returns are lower than the overall costs of the investment then you are able to claim this as a tax deduction against your other income at your marginal income tax rate. This is widely known as negative gearing.

This makes sense if, over time, the capital gain from the investment exceeds your after-tax losses. But you need to be very careful with this strategy, because if the value of the investment falls you will amplify your capital losses while also losing money on your after-tax cash flow.

You should never borrow to invest just for the sake of the tax deduction, or in the hope that markets always rise. You also need to be confident that you can ride out periods when the returns are lower, such as when you have no tenants in a rental property.

DEBT CONSOLIDATION

Debt consolidation involves combining several loans into one loan account. For example, you may increase your home loan to repay your car loan and credit card debt.
You need to be disciplined when consolidating your debt to ensure you do not simply increase your overall debt from other sources.
Credit cards can be wonderfully convenient, but they can also be a real trap for some. If you seem to have ongoing credit card debt that you never seem to pay off fully then this will end up costing you a lot of money. In addition, it may prevent you obtaining or paying off other important loans, such as your home or investment loans.

PROTECT YOURSELF

All lending requires discipline to ensure that you do not over-commit yourself and are able to make repayments, and preferably pay them sooner than required.

You should ensure that you have adequate life insurance (e.g. life, total and permanent disability and income protection) so that you can continue to meet your loan repayments or repay the debt if your income stops or reduces due to death or illness.
Sensible use of debt should be considered as part of your overall financial plan and you should seek professional advice before using debt for wealth creation strategies.

 

Find out more. Call us on 02 9728 3885.

Disclaimer: The articles included on our website are for general information only and have not taken into account a clients’ personal circumstances, goals or objectives. Prior to making any investment decisions you should contact us to ensure that the advice is appropriate to your personal needs and objectives.

This article originally appeared in the InterPrac Newsletter Issue 20. Re-published with permission.

2015/16 Federal Budget

Small businesses, jobs and families were front and centre in the 2015/16 Federal budget, which according to budget.gov.au, has been developed to ensure a safe, secure and prosperous future for Australia. What does that mean for you? Below, we take a look at the key announcements we believe will impact Etlanda clients.

 

Small business owners (defined as businesses with aggregated annual turnover of less than $2m)

  • From 1 July, companies with annual turnover of less than $2m will have their tax rate lowered from 30% to 28.5%.
  • From 7:30pm on 12 May, 2015 until 30 June, 2017, small businesses can claim an immediate tax deduction for “each and every item” purchased up to the value of $20,000. Currently the threshold sits at $1,000.
  • Assets valued at $20,000 or more can continue to be placed into the small business simplified depreciation ‘pool’ and depreciated at 15% in the first income year and 30% each income year after.
  • There will be an annual 5% tax discount of up to $1,000 a year for unincorporated businesses – these are small businesses which are not run as a separate legal entity.
  • From 1 July, the three-year holding period on employee share allocations can be waived by the Commissioner of Taxation if there are circumstances outside of the employee’s control that require them to sell their shares.
  • From 1 July 2016, small business will be able to change the structure of their business, such as moving from a sole trader to a trust, without incurring CGT liability.
  • From 1 April 2016, the government will allow an FBT exemption for small business that provide employees with more than one work-related portable electronic devices such as mobile phones, laptops and tablets.

 

Changes to age pension eligibility

  • The asset test thresholds will increase for a single person to less than $250,000 (currently $202,000) and for a pensioner couple to less than $375,000 (currently $286,000).
  • Non-home owner pensioners will also benefit by an increase in their threshold to $200,000 more than home owner pensioners.
  • The ‘taper rate’ at which age pension begins to phase out will be increased from $1.50 to $3.00 for every $1,000 of assets over the relevant assets test threshold.
  • Pensioners who lost entitlements will be automatically issued with a Commonwealth Seniors Health Card or a Health Care Card (for those who are under Age Pension age).

 

Parents

  • From 1 July 2016, access to parental leave pay will be limited to individuals whose employer does not provide parental leave entitlements, meaning families can no longer ‘double dip’ from both the government and their employer.
  • From 1 July 2017, families will be able to access a single Child Care Subsidy which will assist low-income families earning $65,000 or less with 85% of their child care fees, up to an hourly cap. The subsidy tapers to 50% for families earning less than $185,000 and those earning more than $185,000 will have a $10,000 annual cap.
  • Families who find it difficult to access regular child care services and earn less than $250,000 can apply to participate in The Nannies Trial which will pay for 4,000 nannies across Australia between 1 January 2016 and 31 December 2017.
  • From 1 January 2016, families who choose not to vaccinate their children will no longer be able to receive child care payments or the Family Tax Benefit Part A.

For a full list of 2015/16 Federal Budget Papers click here

If you have any questions about how these changes will impact you or your business, don’t hesitate to get in touch with us by phone: 02 9728 3885.

Disclaimer: The articles included are for general information only and have not taken into account a clients’ personal circumstances, goals or objectives. Prior to making any investment decisions you should contact us to ensure that the advice is appropriate to your personal needs and objectives.