Negative Gear or Franking Credits

by Jason Fittler

Quite often people call us to discuss buying a rental property as they have a tax problem and need to negative gear. I have previously discussed how the benefits of negative gearing are decreasing as the government continue to cut tax rates. (That is a good thing.)

Reducing tax should never be a consideration when deciding on which investment is best for you. Risk, time frame and return should be the key factors with things like structure and tax effectiveness a consideration.

So today I would like to take a look at how a negative geared property stacks up to a positively geared share investment. In this example I will not be looking at the overall growth of the investment.

Let’s start with the old favourite, the investment property. Say a $400,000 investment property of which you have borrowed 100% and you are receiving rent of $350 per week with a marginal tax rate of 30%. Income of $80,000 pa.

Income
Rent $18,200 pa

Less
Interest         $30,000 pa
Rates            $2,500
Other            $2,000    
Depreciation   $7,500

Net Loss            $23,800
Tax Benefit           $7,140

End of the day you would receive a $7,140 tax benefit. (you would get a $7,140 tax refund)

Now let’s take the same $400,000 and invest the funds into fully franked shares yielding 5%.

Income             $28,570 pa
Less interest      $30,000 pa
Net Loss            $1,430

Tax benefit from loss    $430
Franking Credits           $8,570

End of the day you would receive a $9,000 tax benefit. (you would get a $9,000 tax refund)

Summary

Without taking into consideration any growth of the underlying investments, if you are looking to reduce your tax you will get a better result investing fully franked shares.