When it comes to finances, myths and legends are everywhere and some pieces of advice are based more on what is heard on the grapevine than on actual fact. We asked Anthony Bell to bust some of the most stubborn money myths once and for all…
1. Negative gearing is a fail safe way to make money and reduce tax
Negative gearing is simply where you buy an investment property and the costs of ownership such as interest and repairs exceeds the rental income from the property resulting in a “net rental loss”. This net rental loss is then used to reduce your taxable income from other sources such as salaries and wages. The higher your marginal tax rate, the greater the tax deduction available to you.
This can be a great strategy and is widely and successfully employed……but there are two rules that can be overlooked.
- Don’t just chase the tax deduction. You will still have to be able to afford to make up the cash flow shortfall, even after taking into account the tax saved.
- Capital growth must occur. You must still pay a price for the property and in an area that will see sufficient capital growth over time to cover the after tax net rental losses you have accumulated, plus a significant enough margin that results in an adequate return on your investment.
2. I know a great stock that is going places
Be very careful about share market tips for specific shares you hear on the grapevine. More often than not they go as well as the “sure thing in the last race at Randwick”, and you also do not want to be exposed to potential insider trading action.
It is well documented that investment guru Warren Buffett has adopted the strategy that he doesn’t invest in stocks where he doesn’t understand the company or industry the stock relates to. I’m a firm believer in the same philosophy when it comes to investing in shares, other than by way of a diversified portfolio advised by a professional in that space.
There is generally no quick and easy way to build wealth. Developing an investment plan that takes into account your circumstances and hopes and aspirations will be a far better bet over the long term. There is simply no substitute for professional advice.
3. Claim everything you can as a tax deduction, even if it’s a bit dubious, they’ll never check
This comes up from time to time and I have a firm belief that you need to be able to sleep at night and not worry about the Tax Office coming knocking one day. Certainly, minimise your tax by all legitimate means, that’s what good tax advisors will achieve for you, but avoid claiming the dubious deductions and getting involved in tax driven investment schemes.
Generally, the Tax Office can go back up to five years (longer in certain circumstances) and if a tax deduction is disallowed on review or you have not declared all your income, not only will you have to pay back the tax benefit you received, but you will also be charged interest on the amount. Depending on the recklessness of the claim, you may also be liable for up to 75% of the base amount as a penalty. It’s just not worth the risk.
4. Superannuation is a bad investment, put nothing extra into super
This is one of the most common myths around that has been driven by the initial period post the GFC where the value of many members super balances reduced substantially (of recent times we have seen a significant recovery).
With some exceptions you can invest in just about all of the same assets whether inside a superfund or in your personal name. It is not superannuation itself that can be the issue, it is what the superfund actually invests in. This is where the choice of fund becomes important or whether a self managed superannuation fund might be the right option for you.
In fact, superannuation has significant tax advantages over investing in your own name with a maximum tax rate on income earned by a fund of 15% (10% for capital gains for assets held more than twelve months). On retirement and if your fund is converted to “pension mode”, it is possible to actually pay no tax at all!
Of course, you can’t access your super balance until retirement and it is an area that can be complex, so do seek advice, but the principal remains, it is the quality of the investment that counts not merely whether it’s in super or not.
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