Home$600,000
Loan:$200,000
Equity:$400,000

Agnetha decides to make some share market investments. She comes to see us and we discuss the benefits of dollar cost averaging into an index fund. (We won’t go into the details of that here). Agnetha decides that she will establish a line of credit loan against her home to the value of $200,000.

She will use this to make a series of monthly purchases of units in an index-tracking Exchange Traded Fund (ETF). At the end of two years, she has purchased $200,000 worth of units (including brokerage). Her net assets now look like this:

Home:$600,000
Units in ETF:$200,000
Total Assets:$800,000
Home Loan:$200,000
Investment Loan:$200,000
Total Debt:$400,000
Equity:$400,000

Her preferred ETF pays a distribution that is equal to 4% per year. This equates to $8,000 per year on the holding. The interest rate is 6%. This equates to $12,000 in interest payable. Agnetha therefore makes a ‘loss’ of $4,000.

Agnetha’s marginal tax rate is 37%. This means that her income tax reduces by $1,480 as a result of the $4,000 loss (37% of $4,000 is $1,480). The after-tax loss on the investment is now $2,520. This is 1.26% of the amount she has borrowed – meaning that if her investment rises by more than this, the capital gain will more than offset the short-term loss.

However, the capital gain is taxable, at a discounted rate if Agnetha holds the investment for more than 12 months. In order for Agnetha to make a profit after CGT, the capital gain needs to be 1.55% per year.

This is lower than the current inflation rate, meaning that Agnetha will make a profit if her investment (which has been bought over an extended period) keeps track with inflation. Pretty good right?

Let me know your thoughts below and feel free to contact me by clicking on the Get Advice button, you can also give me a call on 08 8431 1644.

Best of luck for your future!

Disclaimer

The tax component of the above article was prepared by Dover Financial Advisers, a registered tax (financial) adviser.

David Siostrom ©Tel: 08 8431 1644 | Email: david@davidsiostrom.com.au | Website: http://www.davidsiostrom.com.au