Taxation of Shares and Negative Gearing

Taxation of Shares and Negative Gearing

Rede Accountants Gold Coast, Brisbane & Toowoomba

Most people associate negative gearing with the property. It equally applies to shares listed on the stock exchange.

What is negative gearing of shares?

It happens where an asset (say, shares) produces income (like dividends) and the combined costs of borrowing and holding that asset exceeds the income generated.  Dividends are basically annual returns paid by companies to their shareholders (owners).

For example, if you were to borrow $100,000 to buy shares for the same amount. The annual interest cost might be $5,000 and annual dividend income might be $4,000. There is an annual tax loss of $1,000 that can be claimed for income tax purposes. Enquire now for our tax accountants in Northern Rivers.

Is negative gearing beneficial?

In the above example, the investor has a loss of $1,000 (ignoring income tax). To be beneficial, the market value of the shares needs to increase by at least $1,000. This applies over the period of time the shares are held. For example, if they are held for 5 years with a net loss of $5,000 (5 years X $1,000)  then capital gains must be at least $5,000.

Taxation implications exist for the annual income loss and capital gains made on the ultimate sale of the shares. There are also benefits from any franking credits that may attach to the dividends.

Little known fact: These days net rental yields on rental property are often lower than dividend yields for major listed companies on the stock exchange. The interest costs for shares depends on how the funds are borrowed. However, you may find the negatively geared losses from shares (combined with franking credits)  can be lower than those for a property of similar value.

Should investors negative gear into shares?

As an accounting firm on the Gold Coast, we are not licensed to advise on this, however, there are many factors that need to be considered other than taxation. You should discuss these with your financial adviser. If you do not have a financial adviser, we can recommend someone.

The commentary is general in nature and should not be seen as specific advice.

For more information on the Taxation of Shares and Negative Gearing please contact us here.

Related Tag: Tax Accountant Northern Rivers.

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