From: yar@cs.su.oz.au (Ray Loyzaga)
Subject: Re: Negative Gearing
Reply-To: yar@cluster.cs.su.oz (Ray Loyzaga)
Organization: Basser Dept of Computer Science, University of Sydney, Australia
Date: Thu, 19 Nov 1992 06:12:21 GMT

In article <chris.722147967@suite.sw.oz.au> chris@suite.sw.oz.au (Chris Maltby) writes:
>There's no doubt that negative gearing of rental property is only
>a winner for the investor when inflation is higher than interest
>rates/marginal tax. This is not true at present. I also agree that
>there are more valuable investments that could be made than speculation
>(because that's what it is) in real estate.
No, it is always a winner, it reduces the cost of funds.
Inflation affects the investment dynamics because a longterm investment
i.e. 10 years leads to an increase in return while the capital
investment shrinks in current dollar value. Thats why people with home
mortgages that have been around for 15 years think nothing of the $400
monthly repayment, whereas back when they first took it out $400
per month was a great slab of their take home pay.

>Among them, and particularly favoured, are equities (ie Shares). An
>investment in some business (especially your own) is much more likely
>to add value to the GDP through multiplier effects, and produce
>employment, exports etc etc. To make this attractive, income from

Well, to tell you the truth, property investments help the GDP and are
affected by the multiplier, as you end up paying someone for an asset
and guess what they do with the money ... yup they probably invest it.

>companies in the form of dividends has a tax-paid component (dividend
>imputation), which can be used as part of your tax payment.
>
>Thus is you borrow (say) $100K at 10% to buy blue-chip shares returning 6.1%
>dividends, your net loss is $4K pa before tax. This will be offset against
>other income. Additionally there is a further $3900K of tax credits to be
>used to offset tax on other income. You don't need even need a capital

Not quite right, you get 39 cents in the dollar for FULLY-FRANKED shares
(which is still usually limited to the blue chip stocks), you get less
for partially franked stock, and zero for unfranked stock.
And you calculation is wrong, you would get 39% of the dividend as a
tax credit (39%*6.1%) or $2379, not the $3900 (or even $3900K :-))
that you are talking about.

>gain on the shares to make this worthwhile. Of course, the risk of capital
>loss on shares is much higher than on residential property.

Sure is higher, particularly in the last 12 months, the stocks are
at a 5 year low, which when you think about it puts it at the October '87
crash level.

>Nevertheless, you should all rush out now and invest in the future of
>Australia, and make heaps on it. Why not choose high-tech industries too.
>Just avoid woodchips, tobacco and uranium (:-).

Most high-tech companies are listed on the second board, and they have
been extremely unstable, a prudent investor would avoid burying a whole
lot of their money there. Of course this still leaves the door open for
the State banks of Victoria and South Australia to play a role ...
If you want fully franked shares you will be investing in banks
and large industrial companies. Avoid ANZ, its current 100% franking is 
about to be reduced drastically next year.
Newsgroups: aus.politics