Tax Effective Investments

Tax effects on investment

Do you understand the tax implications of investing?

The key to building wealth is creating the right investment strategy. Consideration should be given to the way your investments will be taxed and how you can achieve maximum returns.

Preparing a financial plan, setting investment goals and assessing risk can be complicated. If you have any doubts you should consider seeking professional financial advice.

Borrowing to invest

When you borrow funds for investment purposes you can obtain tax benefits.

So long as that investment produces an income, most of the costs of owning it are tax-deductible, including the interest on the loan.

Many home loans allow you to use the equity in your home as a revolving line of credit facility. You could borrow against this equity to diversify into investments such as shares or managed share funds. The interest charges as well as most of the costs of owning the investment is tax deductible so long as that investment produces an income.

If you borrow enough, the costs exceed the income from your investment and the deductions can reduce your other taxable income. It is this feature of negative gearing that often leads people to think it is a miracle cure-a way of getting the taxman to help you build wealth for your future.

In recent times, however, low interest rates have reduced the tax-effectiveness of gearing strategies.

Some important considerations

The returns you make on investing are taxable. The income you receive from interest, dividends and rent are all subject to income tax. If you sell an investment for more than you paid for it, you may be liable for capital gains tax.

How much tax you will have to pay will depend on your overall income, the types of investments you have chosen and how long you have held them. If your investment income is significant, you may also have to pay provisional tax.

If you are a self-funded retiree you will need to be aware of the tax rules. As these rules are complicated and always changing, you might need professional advice about the tax implications of investing.

For further information please contact Amazon Financial Planning