Saturday 7 October 2006

Article of Interest

Todays SMH (Sydney Morning Herald) has a good article "Eased tax rules tempting more into margin loans" that summarises the benefits and risks of gearing into share investments via a margin loan.

"...153,000 brave souls [are] now leveraged against the stockmarket."

"The concept of negative gearing is relatively simple. It's "gearing" because you borrow money to buy a bigger portfolio, pocketing the full benefit of any after-tax capital gain.

It's "negative" because it's designed to run at a loss, which you can claim each year as an offset against your income from other sources to reduce your tax burden."

"The end of the housing boom has sparked a hunt by investors for the next pot of investment gold."

"While the median price of houses in Sydney has fallen 8.5 per cent since peaking in December 2003, the sharemarket has surged more than 50 per cent."

The main benefit of negative gearing is that you are able to convert income taxed at your marginal tax rate, into capital gains, that are taxed at a reduced rate:

"Back in 1999, the Federal Government halved the tax on capital gains for assets held for more than 12 months."

However, gearing into shares is more risky than borrowing to invest in real estate, due to the possibility of getting a margin call if the market slumps:

"After falling pretty steadily for the last two years, the average number of daily margin calls doubled in the June quarter, from one in every 4000 accounts to one in 2000.

A margin call is particularly devastating because as a consequence shares are often sold at depressed prices, magnifying losses."

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