Borrowing to invest in shares can either add to your taxable income or reduce it. It all depends on the type of shares you buy, the type of loan you take out, and where the shares are owned.
With interest rates staying low in recent years, it can be possible to generate more income from the shares you’re buying than the loan you use to purchase them. For example, a loan may be at a 3% interest rate, and the dividend income from shares may be around 4%. This creates an extra 1% of taxable income.
How much income your shares generate depends on the type of shares you buy. Some companies are more growth-oriented and pay less in dividends, which means you may be paying more interest than you receive in dividend income. This is called negative gearing. In this situation, the interest expense of the loan can offset other income you earn and can be a good way to reduce your tax bill.
It’s important too to consider the ownership of the shares before you begin thinking about what shares to buy. If you are likely to have the shares negatively geared, then it may make sense to have them held in the name of the highest income earner in your family. Alternatively, if the shares are going to earn more income than the interest you’re paying, it may make sense to have them in the name of the lowest income-earning member of the family.
You’ve also got the consideration of where the shares are owned, whether it’s a family trust, a company, or an SMSF.