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I want to save tax and increase my family’s wealth.

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Q. I work in the mines, income $97,000 +/- a bit. Have a salary sacrifice vehicle, a wife (at home mum) with 4 kids 7 years old and under.

My Home is valued at around $450,000 owing $340,000, no credit cards and a personal loan $45,000 owing $35,000 (extensions and shed). About $10,000 is in various shares which I have bought over the years and $100,000 in super.

I would like to save some of the tax $’s which I pay and enter the investment property market (negative gearing) or another income generating project to get my family in a better Financial position.

With the way property is going and the expected increase over the next years. However My lender (suncorp) says I don’t have enough security / cash flow to purchase A rental property. I have also heard about other firms (RPM Nation wide)

Where by using a rental income to reduce your principal home loan using offset accounts and capitalizing the interest for a larger tax advantage.

Would you be able to suggest an appropriate strategy for my family to increase our wealth?

Josie’s answer - Thanks for your question. Not sure if you are going to be doing cartwheels once you read my advice.

The only reason I am saying this is that it appears from your question that you are pretty determined to borrow a significant amount of money to purchase an investment property in order to save tax.

You are currently on a good income, particularly when we compare that the average is around $57K, but you also have a reasonable amount of debt. The equity in your home is currently around 75% and repayments on your home loan is more than 30% disposable of your disposable income.

I am assuming this is why Suncorp are hesitant to give you funds at the present time. This is probably a good signal that you are not in a fantastic financial position, in terms of cashflow and assets to purchase an investment property which I am also assuming would cost at least $300K. My thoughts are:-

• Reduce your current debt, particularly your personal loan. You currently have a personal loan of $35K, probably paying around 10%+ interest. The cost of this privilege is $3500 per year.
• As you would be aware, the interest attached to your home is non-deductible and you mentioned the name of a provider that sets up an investment that allows you to capitalize interest. You need to ask yourself why Suncorp, who love to make profits, refused your application to borrow funds, but this other organisation who seems to have a ‘sexy’ strategy might be able to help. Please note that I have not heard of them, nor done any research, so am providing just general information from my experiences (and there are plenty of horrible stories around at the moment). I just wonder if there are strings attached e.g. ask what commissions they receive, is the interest rate higher than those offered by the big banks. Most importantly, make sure you and your accountant are very comfortable with the strategy i.e. non-deductible debt is kept separate to deductible debt.
• Direct Residential Property is not the only investment available. You can also borrow money to buy managed funds which offer a lot more flexibility and investment choices. You can invest in a diverse range of investments, including shares and property, both Australian and International. The good thing about managed funds is that you can invest small amounts. For example, some providers allow you to initially borrow a small amount of money e.g. $10,000 and then add a little each month. This is known as instalment gearing. Furthermore, you can stop and start at any time and you can usually sell within a short period of time. You can’t just sell the bedroom of a direct property.
• The most flexible option in terms of sleeping easy at night for you and your family at the moment is to really concentrate on decreasing your non-deductible debt i.e. your home and personal loans. This way you are achieving a 9% after tax return. Remember your tax rate is currently 40 cents in the dollar. Do not be focused on tax deductions. Remember, you do not receive 100% tax deduction, it is only only 40 cents in the dollar (plus medicare). Negative gearing means you are out of pocket, which means you will have less to pay off the home and personal loans.
• I have always been a big fan of superannuation because of the tax concessions. Salary sacrificing will save you heaps of tax and the money you invest will not accessible for you to purchase the latest motor vehicle. Also, it will definitely be invested for the long term. Remember, super funds will deduct 15% from your gross salary, whereas if it is paid to you it will be taxed at 41.5%. You are creating instant wealth, by simply paying more to yourself rather than the tax man. Only problem is that you can’t touch it and politicians wanting to change the rules (which I am not worried about as they will lose votes if they did and we know what drives them!).

To sum up, the obvious answer is that some serious budgeting is required (and I am sure you know this).

Admittedly quite boring, but I would be more excited by your proposal to purchase an investment property if you reduced your non-deductible debt by a significant amount.

Alister, my thoughts include the fact that you have to support four children under 7. I think this is just wonderful and hope Peter Costello thanked you for doing your bit for Australia’s ageing population.

Your wife is my hero. Hope all the above makes sense and wishing you lots of good fortune for the future. Josie

Don’t forget that the above information is general in nature and not specific to your goals and objectives. It is recommended that you seek personal financial advice specific to your needs. Thanks for posting your question on www.askjosiekay.com. As you know, this is a free service and if you found it useful, we would be chuffed if you told your friends, family and workmates about www.askjosiekay.com – free financial advice by a Certified Financial Planner. No strings attached! Wishing you happy money organisation.

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