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Borrowing to invest what are your options


´╗┐BORROWING to invest has fallen from favour, despite the numbers surrounding it now stacking up better than ever.

Horror stories from the global financial crisis where retirees lost their houses after dodgy advisers told them to use aggressive home equity loan strategies to buy shares have haunted the psyche of many Australians.

COMPARE HOME LOANS

Reserve Bank data shows that margin lending once popular among investors is still at less than one third of the levels achieved during the sharemarkets peak in 2007.

Indeed borrowing to invest is not for the faint-hearted and you will need to do your research or talk to a financial adviser. However, todays low interest rates and high share dividends present a compelling argument for borrowing.

When you can borrow money at less than 5 per cent to buy a blue-chip share that is effectively paying 8 or 9 per cent a year in income, some investors see it as a no-brainer.

I cant see why you wouldnt do it, as long as you are not going to be a forced seller, says Middletons Securities adviser David Middleton.

Borrowing improves your cash flow it doesnt make it worse, he says. You cant claim for negative gearing, but its better to pay tax on a profit rather than get a tax deduction for a loss.

Borrowing magnifies investment losses and investment gains, so it must be a long-term investment. For investors who borrowed before the GFC, that long-term is stretching towards a decade because the overall markets value is still well below its 2007 peak. If you can stomach the volatility and look long term, here are some options:

Borrowing against your home gives you the lowest interest rate and the most secure loan. As long as you pay the interest its all good.

People who lost their homes in the GFC typically borrowed against their home and then borrowed again through a margin loan, coming unstuck by this double-gearing strategy when share prices halved.

Youll pay higher interest than a mortgage and your shares are used as security, so if they fall too low you get a margin call where you have to stump up extra cash or your shares get sold from under you.

Margin lenders generally allow borrowings up to 70 per cent of a shares value, but Middleton says its best to limit your debt to no more than 30 per cent of the value so you can withstand a significant downturn without suffering a margin call.

Geared share funds take your money and typically borrow against that so you own twice the shares you could otherwise buy. This means you can win big and lose big.

You can get very volatile valuations from these because they amplify returns, Middleton says.

Budget 2016 winners and losers


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IN EVERY Budget there are those who win big and those who lose out.

This time, women, small business and home-owners are among the victors.

WINNERS

PEOPLE WHO EARN ABOUT $80,000

Around 500,000 workers have been saved from the clutches of dreaded bracket creep.

The government is increasing the upper limit for the second highest tax bracket of 37 cents in the dollar from $80,000 to $87,000.

Rather than being taxed at 37 per cent on every dollar earned over $80,000, workers in that magic range will stay on the 32.5 per cent tax rate.

That would leave them up to $315 better off come tax time.

Bracket creep, where the process of inflation pushes people into higher income brackets without an increase in their spending power, has been described as taxation by stealth.

Scott Morrison said the government would like to do more, but this is what we can afford today.

The changes will cost the budget $3.95 billion over the next four years.

Modelling by the Centre for Independent Studies has put the cost of completely winding back the clock on bracket creep at $12.5 billion in the first year alone.

That plan would reduce taxes equivalent to wage growth since 2012-13 the last time the tax rates were changed and then index the tax thresholds in line with inflation or wage growth.

One-off increases in tax thresholds do not fix bracket creep permanently, CIS economist Michael Potter said recently. Piecemeal solutions are not a fix at all.

BUSINESS BIG AND SMALL

Small businesses are getting another tax cut, while big businesses will get access to the lower tax rate as well eventually.

The government will do this using an incremental process, firstly by gradually increasing the size of businesses that can access the lower tax rate of 27.5 per cent, and finally by reducing the tax rate for all business to 25 per cent.

The threshold will increase from $10 million to $25 million in 2017-18, to $50 million in 2018-19, and $100 million in 2019-20.

That will mean by 2020, around 4.9 million people more than half of all employees in the country will be working at companies paying the lower tax rate of 27.5 per cent.

The threshold will increase every year until 2023-24, before a final tax cut for all businesses to 25 per cent in 2026-27.

At the same time, the instant tax deduction for business equipment under $20,000, first introduced for small businesses last year, will be extended to businesses with turnover of less than $10 million.

UNEMPLOYED YOUTH

There is an ambitious new attempt to get vulnerable young people into jobs called Youth Jobs PaTH Prepare, Trial, Hire.

Starting in April next year, job seekers under the age of 25 will be able to register for intensive pre-employment skills training focusing on skills including working in a team, presentation and computer literacy.

The government will then work with businesses to introduce an internship program where the job seeker will work 15 to 25 hours a week for between one and three months.

During the internship the government will top up the jobseekers' regular income support payment with an extra $200 per fortnight. This is real work for the dole, Scott Morrison said.

Businesses will receive $1000 upfront for taking on the interns, and if they choose to hire them at the end of the period the government will chip in between $6500 and $10,000 towards their wage, depending on their job readiness.

The program will cost $752 million over four years, which Mr Morrison says will partly come from better targeting of work for the dole funding.

WOMEN

Women who take time off work to have children have largely been recognised as struggling when it comes to saving for their retirement.

The government is now trying to help them build up their super by refunding tax paid on super contributions while they are living on a low-income, and allowing them to bump up their super in later years when they start earning higher wages again.

They will get up to $500 tax refunded if they earn less than $37,000, and will be able to rollover super balances for five years when they put less than $25,000 a year into super.

Their partners will also get tax offsets if they put money into their low-income spouses super.

PEOPLE ON LOW INCOMES

The Medicare levy low-income thresholds will be increased to $21,335 (for a single person), so that low income taxpayers can continue to be exempted from paying the Medicare levy.

The government will also keep a tax offset that means they will get up to $500 of the tax they pay on their super refunded if they earn less than $37,000.

PROPERTY OWNERS

This Budget is another battle in the war between property seekers and those already reaping the rewards of investment and home ownership.

And once again, the homeowners have come out on top.

The Government has relieved nerves among owners who feared they may lose their investment income thanks to negative gearing and capital gains discounts. Changes to those measures would also see house prices down, relieving some pressure on those looking to enter the market.

But Treasurer Scott Morrison decided he didnt want to be unfair to property owners and undermine the value of their own home and investment.

So hes not making any changes to negative gearing and capital gains tax.

Though the tax concessions are pushing house prices higher which is bad news for property seekers the Government doesnt think thats reason enough to increase the tax burden on Australians who are just trying to invest.

RAIL ENTHUSIASTS

Think a rail line from Brisbane and Melbourne sounds like a good idea? Well the government is helping to make this dream a reality by providing $594 million in extra equity to help build an integrated inland freight link connecting the two cities. The money will help the Australian Rail Track Corporation to buy land and to continue pre-construction works and due diligence activities.

In Victoria, there will be $220 million for the Murray Basin freight rail upgrade and $10 million to progress the business case for the Melbourne Metro rail project. The Federal Government is also finalising an agreement to provide $847 million towards the Melbourne Metro.

In NSW, the government will provide $115 million to continue preparation for the Western Sydney Airport at Badgerys Creek, including $26 million for a concept design for rail services through the site.

VICTORIANS

The state was willing to go it alone on its infrastructure projects but little did they know the Federal Government would come to the table.

The $1.5 billion in funding that was previously paid to Victoria for construction of the East West Link road project will be reallocated to other projects including $350 million for the Western Ring Rd, $220 million for the Murray Basin freight rail upgrade, $500 million on the Monash Freeway, $345 million for rural and regional highways, $75 million for urban congestion and $10 million to progress the business case for the Melbourne Metro.

The Abbott government had previously tried to claw this money back as a savings measure in the previous Budget, saying the funding was earmarked for the dumped East West Link project.

While retaining the money is positive for the state, Victorian Treasurer Tim Pallas has pointed out that the funds were already in the states budget, and the states taxes are continuing to pay for infrastructure projects in Sydney and Brisbane.

The Treasurer Scott Morrison also confirmed this week $857 million would be spent on the Melbourne Metro from its asset recycling fund after the state passed laws to sell the 50-year lease of the Port of Melbourne.

WATER LOVERS

The government will also establish a $2 billion Water Infrastructure Loan Facility to promote new investment in dams and pipelines across Australia, building on the existing National Water Infrastructure Development Fund and the Northern Australia Infrastructure Facility.

LOSERS

SMOKERS

Yes, youll have to pay more for smokes, but youll have the gratitude of the rest of the nation for contributing $4.7 billion to the national coffers over the next four years.

The Government has a further four annual 12.5 per cent increases in tobacco excise planned. This will see the price of cigarettes continue to go up. The Government will implement a further four annual 12.5 per cent increases in tobacco excise, the first coming into effect next September.

That means the price of cigarettes will go up every year, edging closer to the $40 pack smokers all fear.

Also from July 1 next year, smokers will only be allowed to leave the airport with 25 cigarettes or equivalent, rather than the current 50.

HIGH-INCOME EARNERS

Rich Australians will be slugged with a $2.9 billion tax grab as the government winds back their generous concessions.

Anyone who earns more than $250,000 will have to pay 30 per cent tax on their super contributions (up from 15 per cent).

Others will only be able to enjoy a 15 per cent tax rate on money they salary sacrifice up to a limit of $25,000 (down from $30,000).

This will impact those on average incomes of about $210,000.

WORKING PARENTS

The start of the new Child Care Subsidy, announced in the previous Budget, has been pushed back to July 1, 2018. It would have removed a $7500 rebate cap for families earning less than $185,000 from July 2017. Instead families would have been able to claim up to $10,000 a child.

The government has linked the subsidy to cuts to the Family Tax Benefit, which it has been unable to get through the Senate.

However, the government will implement the rest of its child care package. This includes extending the Nanny Pilot Program to June 30, 2018 to provide assistance to more families who are having difficulty accessing mainstream child care.

The government is also implementing the Inclusion Support Program to provide extra care for vulnerable children commencing on July 1, 2016.

FIRST HOME BUYERS

Renters seeking to crack the property market never had high hopes for this Budget, and the Treasurer confirmed those fears.

While the Prime Minister announced last month housing affordability was not high on the Governments Budget agenda, at least we now have a bit of a better explanation why.

Confirming negative gearing would not be removed or limited, and capital gains tax would not be changed, Mr Morrison made out he was doing average taxpayers a favour.

Those earning less than $80,000 a year in taxable income make up two thirds of those who use negative gearing, he said in his speech.

We do not consider that taxing these Australians more on their investments, including increasing their capital gains tax, and undermining the value of their own home and investment is a plan for jobs and growth.

Mr Morrison said removing or limiting negative gearing, which is contributing to record house prices and pricing first homebuyers out of the market, would increase the tax burden on Australians just trying to invest and provide a future for their families.

For those who have not yet invested, too bad.

UNIVERSITY STUDENTS

Look for the Treasurers detail on what they plan for universities over the next four years in the reams of Budget papers and you wont find a thing.

But hidden in a tiny table is the not insignificant detail they plan to somehow save $2 billion through deregulation by 2020, indicating big cuts to higher education funding.

The document declares the Government has walked away from the 2014-15 Budgets controversial proposal to deregulate fees. But pending further consultation, the proposal to cut funding to universities by 20 per cent, along with changes to how student loans are repaid and recovered remain on the table.

By deferring any action until 2018, i.e. outside the 2016-17 Budget period, it looks like the Government has intended to put the controversial issue on the back burner, and save unpopular decision making for after the election.

Students were expecting deregulation and cuts to funding with protests next planned well before the Budget dropped, and now theyre feeling sold out, student union leaders have said.

DSP RECIPIENTS

The crackdown on welfare rorting continues.

Each year for the next three years, 30,000 Disability Support Pension recipients will have to justify themselves or be kicked off.

The government says it expects to save $62.1 million over the next five years as a result of reassessing DSP recipients on their capacity to work.

PUBLIC SERVANTS

Public servants are facing even more job losses as the government cuts $1.4 billion over the three years to 2019-20.

They will also not escape the crackdown on super funds. Those using defined benefit schemes will also be subject to government measures targeting those on higher incomes.

Those earning over $250,000 will have to pay a higher tax rate on their contributions.

Other measures include capping tax offsets for those in unfunded schemes and increase tax paid by those in funded schemes.

STATES OTHER THAN VICTORIA

The government says its investing a record $50 billion in infrastructure from 2013-14 to 2019-2020 with about 100 major projects under construction and about 80 in pre-construction stage.

But while Victoria will benefit from a boost in infrastructure spending, the new announcements for other states were a bit thin on the ground.

In Western Australia, $490 million is being provided for the Forrestfield-Airport Link and $261 million for section two of the Perth Freight Link.

Those in Queensland will get $200m for the Ipswich Motorway, while in NSW there will be $115 million to continue preparation for the Western Sydney Airport at Badgerys Creek.

The government will also reallocate $853 million in funding earmarked for infrastructure as part of the asset recycling initiative as its unlikely it will come to any further agreements with the states. The government is expected to provide $3.3 billion in funding to the states, which will help $22 billion worth of infrastructure projects get off the ground, once the agreements are finalised.

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