1. The Mysteries of Negative Gearing Negative gearing is a legitimate tax planning strategy but it is not for everyone. Derek Miles www.financialmilestones.com.au

2. What can you negative gear ? Property – the most common and well known Shares or managed funds (margin loans) Business assets Managed Investment Schemes – agriculture or forestry

3. What is Negative Gearing ? It is the offsetting of the difference between investment income and the expenses incurred in holding these investments, against other ordinary income such as PAYG income and thereby benefiting from a tax refund of PAYG tax already paid.

4. An example of negative gearing Tax Payable (incl Medicare L) Taxable income 85,000 $21,875 Gross rental income 18,200 Less expenses:- Interest on loan (8%pa) 28,000 Rates 2,400 Agents fees 1,500 Maintenance 3,000 Borrowing Costs 800 Building Allowance 6,250 Depreciation 5,600 Other 1,000 Total Expenses 48,550 Rental Loss 30,350 New Taxable Income 54,650$11,815

5. What is the cash flow consequence ? Inflows:- Gross rental income 18,200 Refund 10,060 28,260 Outflows:- Interest on loan (8%pa) 28,000 Rates 2,400 Agents fees 1,500 Maintenance 3,000 Other 1,000 35,900 Negative Cash Flow $7,640 Non Cash Items (but tax deductible) Borrowing Costs 800 Building Allowance 6,250 Depreciation 5,600

6. Misconceptions 1 You must have paid PAYG for the cash flow to work (for business clients it is a reduction of tax payable so they still need to have the cash flow to support the negatively geared investment). You cannot purchase investment after investment – you must have the cash flow from other income to support the negative gearing and there is a limit. You purchase an investment that requires a larger loan than you can afford. What if the investments stop earning – can you support the debt? Negative gearing is not as attractive for lower incomes. It works best with the highest tax bracket.

7. Misconceptions 2 Negative gearing is prone to hiding poor investment assets (mistrust investments sold with negative gearing as the dominant motive). The investment assets must have a reasonable basis of return. You cannot negatively gear effectively in a trust or company (losses cannot be transferred against personal incomes. Changing your home to a negative gearing asset is ineffective – you cannot transfer debt (further explanation).

8. Who’s advice should you seek ? Your Accountant – Tax Advice – Cash flow analysis. Your Financial Planner – investment advice/affordability Your Mortgage Broker – most effective borrowings Quantity Surveyor – cost analysis of the depreciable items that are deductible

10. Free ELS lodgment

11. Setting up books of accounts and designing business systems

12. Preparing borrowing proposals and advising on best financing methods

13. Tax return and financial accounts preparation

14. Company registers and statutory matters

15. Preparing income, expenses, capital and cash flow budgets

16. Tax minimisation and associated tax planning strategies

17. Assisting with tax audits

18. Computer comparisons on financing decisions

19. Analysis for businesses so that they make a profit and keep it

20. Structured business coaching including development of business plans and business strategy developmentPhone :- 07 3396 7757 Mobile:- 0411 865 695 Email:- derek@financialmilestones.com.au Web:- www.financialmilestones.com.au Address:- 2/71 Edith Street, Wynnum