Tax reform: Small relief for debt recycling into shares (negative gearing not affected)
A key statement in the new budget regarding negative gearing when investing into shares is the following (see page 4 here):
>Changes to negative gearing will only apply to residential property. Commercial property and other asset classes, such as shares, will remain subject to existing arrangements.
What this means:
- You buy your primary residence and can't deduct your interest from your taxes.
- You then pay back chunks of your loan and redraw.
- You then invest these amounts into shares / ETFs etc., which produce taxable income (dividends), but are negatively geared (the annual dividends are less than the annual interest of your redrawn loan).
In this scenario, you would still be able to deduct the remaining interest from other income in your taxes.
Similarly, if you use general margin loans to invest in shares or other assets (which are not residential properties), you can still deduct the interest against other income.
KEY QUESTION DUE TO HIGHER CGT: There might be many scenarios where it is financially better to not utilize the full negative gearing, but instead put more after tax money into super to have no capital gains tax at the time of retirement. This should be carefully analyzed.