Getting good advice
by STEWART RUPPERT
from Trillium Wealth Management
I receive many calls each week from people looking for financial advice. As a slight deviation to the normal format of this article I thought that readers might be interested to hear a few of the questions that have been asked and my responses to them.
Q: My partner and I have mostly paid off the unit that we live in and our accountant suggested that we should consider buying an investment property as we both work and pay a lot of tax. How does negative gearing work and is now a good time to buy?
A: Negative gearing is where, as a consequence of borrowing costs (gearing), the income resulting from an investment is in a loss situation (negative).
The flow-on from this is that this loss can be claimed to the taxman (ATO) and a refund to your rate of tax will result. Your costs in owning will include interest expenses, strata costs (if a unit), agent fees etc.
What many people do not realise, however, is that you can also claim as an expense the depreciating value of fixtures and fittings (carpets, curtains, light fittings, etc.) and possibly even the structure itself (if less than 20 years old as a rough guide). The additional tax deductions created from depreciation can often lead to a situation where, in effect, the cost to hold the property is virtually nil after the tenant and the taxman have made their respective contributions.
At the present time rent yields are quite strong and there are a lot of sellers out there prepared to take less for their properties than they normally would. So, on the face of it you might think that property was a good option at the present time.
All that said, I believe that we will see some significant falls in the value of property over the next two to three years -” perhaps as much as 25 percent from current levels -” so I do not advocate buying property at this time. There is a brewing storm in world financial markets that many are calling The Perfect Storm and Australia will not be spared from the effects of it.
In a survey of the major developed Western economies we find that Australia has the most expensive property prices (in a relative sense to earnings) of any other country and just as the US and the UK have begun to pay for their sins in this regard so shall we soon.
Not only do I recommend for people not to invest in property at this time, I am also recommending that people look to divest themselves (particularly if they carry massive mortgages).
Q: I have made a lot of money in the share market in the past but in the last year have lost it all (plus some). Given recent share market falls, which stocks should I be investing in now for decent income and growth?
A: If you were coming to me as a new client with cash in hand I would not be putting you into any shares at this time.
My general belief is that there is just too much negative sentiment around and that more falls are likely. As alluded to above, there is a confluence of factors leading to The Perfect Storm in global economic terms.
There is high global inflation due to oil and food prices, repressed economic growth, declining company profitability due to higher input costs, rising interest rates and the credit crisis. These issues are providing a real threat to markets and to economies. In local terms, I think that the Reserve Bank and the media have talked us into a point where a recession come the end of the year is highly likely. So, in summary, I would recommend sitting on the sidelines until the clouds pass a little.
Disclaimer: This is general information only and is not intended to provide advice to particular investors, or take into account an individual’s investment objectives, circumstances or needs for investment. Investors should first consult Trillium Wealth Management Pty Ltd.
