Thank you for downloading the Smart Investing podcast from index fund manager Vanguard Investments Australia, on the web at vanguard.com.au

This commentary is written by Principal at Vanguard's Investment Strategy Group Roger McIntosh. The title is Borrowing to invest

It was first published on Friday 18 May 2012

And is read by Michael Mullins

Please remember that advice in this podcast represents a general view. It is recommended that you seek specific financial advice, before making investment decisions.

The Federal Budget’s confirmation that the annual cap on concessional superannuation contributions for all fund members over 50 will halve to $25,000 from the 2012-13 financial year, has some investment commentators envisaging that more investors will turn to negative gearing.

Their reasoning is that the reduced availability of superannuation tax benefits arising from the lowering of the concessional contributions cap will encourage a number of investors to reconsider the potential tax benefits of gearing.

From a tax perspective, one of the key attractions of making concessional superannuation contributions up to the annual cap is that the amounts are not taxed at marginal tax rates but at 15 per cent upon entering a super fund.

(Concessional contributions comprise salary-sacrificed and compulsory contributions as well as tax-deductible contributions by the self-employed and eligible investors.)

The tax treatment of negative gearing is also relatively simple to understand.

An investment such as shares or property is said to be negatively geared when interest on the investment loan exceeds the dividends or rent. And the shortfall between an investment’s income and its deductible costs (including interest) is deductible against an investor’s other income.

But while negative gearing is a widely-used investment strategy, investors should never overlook the added risks involved. While negative gearing magnifies gains when asset prices are rising, it magnifies losses when prices are falling.

Particularly given the difficult share and residential property markets in recent years, many investors are showing a marked reluctance to borrow to invest.

Reserve Bank statistics show that the total amount outstanding in margin loans taken to invest in shares and managed funds fell to $15 billion by December last year (the latest figure available). This was the lowest in seven years.

As financial planners often tell their clients, an investment should not be undertaken with the main objective of gaining a tax advantage. Crucially, it should make sense from an investment standpoint.

And that concludes the column

Borrowing to invest

from Principal at Vanguard's Investment Strategy Group Roger McIntosh

To receive the column by email each week go to vanguard.com.au and register with Smart Investing. 

Please remember that advice in this podcast represents a general view. It is recommended that you seek specific financial advice, before making investment decisions.