All Ords Report 22 July 2015
Australians have borrowed big to invest in the property market, however, it seems that the Reserve Bank of Australia (RBA) want to change the rules around negative gearing and capital gains tax. Should you be concerned?
The RBA has raised a red flag at the investor driven surge in property prices, telling the government that they need to address the combination of negative gearing, and the 50 per cent discount on capital gains tax which is permitted when a property is sold after 12 months, as it may encourage leveraged investment.
This isnít a revelation, these policies have been around to encourage investment since I was a boy. So why point the finger at tax rules now when this has been in place for years? Past governments tried to scrap negative gearing and failed. Our treasurer, Joe Hockey, seems adamant that there will be no change to the current tax rules which allow property investors to claim tax deductions for expenses related to their property investments, including interest on borrowings.
What I find most interesting is when I ask ordinary Australians what is fueling property price hikes they tell me itís foreign investment. So why doesnít the RBA see it? With the current RBA policy, which is for a lower AUD, Australian real estate is only going to get cheaper for overseas investors. Given this, where do you think restrictions ought to be applied?
Further, if changes are made to negative gearing for property, what will be next?
This is the question that a number of share investors have asked me recently, and you have a right to be concerned because if the rules change around property investing they could just as easily be applied to your share market investments.
Currently, if you invest in the share market, and if you hold a share for more than 12 months you are only taxed on 50 per cent of the gains. If you borrow to buy shares, say using a margin loan, or a line of credit against property, the interest on the borrowings for the shares may be expensed, that is you may be able to claim this cost as a tax deduction.
What do I believe the probability is for such a change to occur? At this point in time, highly unlikely.
Remember though, I am not a tax expert, my expertise is in the share market, in managing your share investments, and educating you to learn how to invest for yourself. So, Iím not the person to ask about tax. The best advice I can give you on this subject is to read the relevant pages on the Australian Taxation Office (ATO) website, and then if necessary, consult your accountant, or taxation specialist.
After all, you wouldnít ask your doctor for advice on tax, just as you wouldnít seek a medical opinion from your accountant. Can you imagine what going for your next medical checkup would be like? You open the door and there is your accountant standing thereÖ..
While Iím on the subject of selecting the specialists to have on your team, so too, a financial planner is the person for estate planning, wills, trusts, superannuation, financial budgeting and saving. However, a financial planner is not typically an expert in stock selection and management, they generally rely on research houses or investment specialists. Therefore, be sure to check the credentials of the person you are seeking advice from before you sit down for a chat.
So what do we expect in the market?
Australian investors breathed a sigh of relief last week as the recent fall on the share market was arrested. The All Ordinaries Index (XAO) sprang from its recent low of 5372 points, to close just above the important level I had previously flagged as potential support for the next rise, at around 5400 points.
The market continued strongly higher on Friday to close just below 5700 points, representing a gain of around 3 per cent above the prior weekís close, and therefore it appears that the market may have turned. That said, it is early days, and my analysis indicates that the market must rise strongly above 5750 points over the coming weeks. So continue to watch this spaceÖ.
Finally, the hysteria around Greece has settled down, however as I have said before, this issue will rear its ugly head again. Given this, one has to ask, should we spend time discussing whether what the creditors offered Greece was a fair deal or just a band-aid measure?
My answer to this is simple, we can all look back together in previous decades and find reasons that can be attributed to a market fall. Thousands of books have been written about what has occurred in financial markets, and although being well versed in this area may mean that you are the centre of attention at dinner parties, putting your focus on the stories isnít going to make you a better investor, nor build your wealth.
Following the next rise on our market, if the next story to drive the market south isnít about Greece, it will be the Chinese slow down or strife in their financial system, or the FED finally making its decision to raise rates in the US, or issues on our shores related to banks and the level of capital they must hold, and letís not forget company earnings if forecasts fail to meet market expectations.
The important reality of investing in the share market is to first accept that markets are cyclical, which means that the market isnít going to rise in a straight line. Therefore, as an investor you have to be prepared to be in a position to take advantage of a rise and have a plan to manage risk if there is a fall.
So donít just let your money ride the share market waves, which could be referred to as passive investing. Without a solid investment strategy, which focusses on managing risk, your money will be exposed to every twist and turn on the market. My Senior Analyst, Janine Cox, talks about being a passive investor and how this can wipe out returns. Feel free to listen to the latest Talking Wealth podcast.
Right now, the US is the in the middle of reporting season, and many Australian companies are declaring their current state of affairs. Be aware that this can cause both the US and our market to rise quickly if the news is good, or fall if the opposite occurs.
Locally, as Australian companies prepare their reports for the end of financial year 2015, the market will be looking for positive growth forecasts and companies that produce the goods will be strongly rewarded. Conversely, the market may sell a share down strongly if expectations are not met, which means you may have to remove the stock from your portfolio if your exit rules are met, otherwise risk further falls and a greater risk for your portfolio. At the same time, be ready to buy the shares that move higher, and meet solid entry rules, as they are more likely to continue to rise.
Finally, savvy investors know it is important to be active with your investments, and to have a good risk management plan in place.
Dale Gillham is Chief Analyst at Wealth Within