Tag: Financial planner

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Finance

What is negative gearing?

Negative gearing is a rising trend among investors. People who want to purchase investment properties often need to borrow money from lending institutions. When people borrow, they calculate the risks and potential rewards carefully. Most ordinary investors will try to ensure the monthly profits from their investment property will surpass the mortgage repayments and interest rates.

Negative gearing doesn’t follow the same rules. People borrow money knowing that the profits from the property won’t cover the monthly interest and mortgage repayments. Investors make up for the shortfall between the interest payments and income earned with the help of deductions from their current income tax. Negative gearing is prevalent in Canada, Australia, and New Zealand because of the tax policies and concessions in these countries.

What is the benefit of negative gearing?

Why would you invest in a property that doesn’t offer profits that actively cover your expenses? Even if you get a tax break from the government, you don’t earn enough profit through rent to justify the initial investment. Here’s what you need to understand about negative gearing:

  1. Negative gearing works because investors don’t intend to retain the property over the long-term. Their investment only bears fruit after they pay off their loan and sell the property.
  2. For negative gearing to be profitable, the property must be a part of a thriving housing market. Property values should increase over time instead of remaining steady or decreasing.
  3. If you purchase the right property in the right market, you can potentially earn several hundred thousand dollars in profit. This investment is risky and can potentially lead to complete loss of money.
  4. Investors need to plan carefully and ensure they have enough financial stability to bear the shortfall between interest rates and income even with the tax break.

Negative gearing is a financially sound decision only if your capital gains are greater than your initial investments and related expenses.

How does negative gearing work?

You need to consider a number of factors before you invest in negative gearing. If you don’t plan your investment well, you can face losses amounting to several thousand dollars. Here’s what you need to consider:

  1. The total income from the property. For this, you need to multiply the weekly rent by 52 to calculate the annual income.
  2. Tally all expenses including mortgage repayments, vacancy, repairs, insurance, manager fees, bank fees, council rates, water rates, land tax, strata fees, and property improvements costs.
  3. Subtract the total expenses from the income. Deduct depreciation as well.
  4. Calculate the amount of tax you need to pay and determine how much of it will be refundable.
  5. Consider the capital growth of the property in the market.

All of these factors will help you determine the capital gains from your investment. If you don’t perform these calculations, you won’t know if the property is worth investing in and whether you will get enough money to justify the investment. This is how negative gearing works and delivers profit. It relies solely on the market demand and supply as well as the growth in property rates.

An example of negative gearing

It’s not easy to understand how negative gearing works without considering a real-life example. Here is an example that illustrates how you can earn profit using this investment strategy:

  1. You purchase a $440,000 property on a loan of $400,000 with 7% interest rates. Your interest will be around $28,000.
  2. If you earn around $450 rent every week on this property, you earn $23,400 in annual rent income, which leaves you with a shortfall of $4,600.
  3. If the value of the property increases by 10%, you gain a profit of $44,000 at the end of the year and once you remove the shortfall of $4,600, you have an overall profit of $39,600.
  4. You can deduct the other expenses from this calculation and still get ample profit at the end of the year.

If the value of the property doesn’t grow by 10% or more, you won’t gain enough profit to justify your investment.

Contact local property lawyers

What expenses can you claim as deductions?

In most cases, you can claim a deduction for any expenses related to the management and maintenance of an investment property, this includes any interest you pay on loans. When your asset is negatively geared, you may be able to deduct the full amount of rental expenses against your rental and other income, including your salary and wages.

The rule of thumb is, property investors can claim deductions in three main categories:

  • Building allowances – in most cases you can claim building allowances such as for depreciation over time
  • Revenue deductions – you may be eligible to claim revenue deductions such as the interest on borrowed funds
  • Capital items – major items such as a oven or dryer in a rental property are subject to depreciation over time and can be claimed over several years

Are there any changes in negative gearing in 2021?

The 2021 budget includes a number of measures relevant to property investors, however it doesn’t directly address or change existing arrangements around negative gearing.

How does this affect Australians?

Negative gearing is still a good investment option for Australians, particularly if you have enough financial stability to support the shortfall between the interest rates and the income generated. The housing market is on the upward trend so you can expect the value of the property to grow comfortably over a short period of time.

It’s a good idea to consider a short-term investment instead of long term investment if you intend to use negative gearing. Most people only invest for one year and see several thousand dollars in profit. This can keep you safe from any changes to regulations the government makes in future years.

Categories
Legal

Types of insurance for businesses

The rise of micro businesses in Australia is a testament to the freedom and opportunities that running a small enterprise provides. But as more people are choosing to go out and provide specialised trade services, more are being faced with insurance issues that they haven’t encountered before. If the aim is to build a healthy and robust small business community, it’s crucial that more tradies understand insurance well enough to make informed decisions about their risk management plan.

There has been a huge jump in small businesses, it means more business owners have less resources and limited experience with business insurance. If the trend continues, this issue could become a very real form of exposure within the business community.

With this in mind, let’s have a look at some of the major insurance types that tradies should consider. We’ll also offer some hints on what to consider before you buy, and the kind of information you’ll want to have handy.

Plumbing services require insurance / Source: Clever Plumbing Solutions

Public Liability Insurance

Public Liability (PL) insurance is the number one priority for most small businesses because it covers a huge legal liability – the duty of care we have to keep others and their property safe from injury or damage. Whether a claim is valid or not, PL protects you against the legal and compensation costs involved.

Due to the nature of the claims involved, costs for PL cases can stretch well into the millions of dollars, so the risk for a small business can be incredibly high. Claims can stem from something as seemingly innocuous as tripping on a loose cord, accidentally bumping an expensive piece of equipment, or spilling coffee on a client’s laptop.

Highlighting the importance of PL insurance is the fact that many government and professional organisations require minimum coverage before they’ll licence a practitioner or grant membership admittance.

Professional Indemnity Insurance

Professional Indemnity (PI) insurance is crucial if you provide advice or services, and protects against the legal costs of being accused of any breach of duty. PI protects professionals against a huge legal liability by covering the risk of negligence, and will pay for court costs and compensation claims – regardless of whether a claim is valid or not.

Common business types that require PI include accountants, bookkeepers, masseurs, beauty therapists, consultants, life coaches, personal trainers and psychologists. Claims can arise from something as simple as an accountant missing a tax expense, to something more complex such as an engineering or architectural error leading to faulty building construction.

Small tradesman team / Source: Richard Walker Plumbing

Business Insurance

Business Insurance (BI) can protect your contents and work premises against loss, damage or theft, as well as the financial pain of business interruption. But this is just the tip of the iceberg, as BI is really an umbrella term for a host of cover options, including things like machinery breakdown, glass, theft, portable equipment, employee dishonesty and money.

With BI, you can literally pick and choose the options you want to include, depending on the nature of your business and specific items that you wish to insure. It might be your tools, your dishwasher or the glass in your store. It may even be that you want to protect yourself against the expense involved in a tax audit, or business interruption so that an insured event doesn’t stop the flow of cash to your company.

The point of BI is that it should be tailored to your specific business needs. Be aware of the exclusions in your policy, however. Finding out you’re not covered for a claim after the event is a painful way to learn.

PI, PL, and BI are the primary insurance types that micro-businesses may need, but there are others that warrant consideration, including Management Liability, Personal Accident and Cyber Liability insurance. Personal Accident insurance, in particular, is widely needed as it protects your most valuable real asset – your ability to earn an income. Also, as more business is conducted online, the threat of cyber attacks is turning more business owners to Cyber Liability insurance.

Contact local property lawyers

Where to begin

The process of purchasing business insurance should be prefaced by a little bit of forethought and a small amount of research.

The forethought is related to risk. Ask yourself what kind of insurable risks your business faces and what the severity of those risks might be. The level of impact is key, because severity is much more important than probability. You want to protect yourself against the events that could do the most damage, not the ones that you could easily handle. You’ll also want to have a think about how you personally feel about risk. Do you have a high tolerance for it, or does the thought of risk keep you awake at night?

The research part is mostly about collecting the basic information you’ll need to have handy when you take action, including:

  • Location
  • ABN
  • Industry
  • Business size
  • Number of employees
  • Turnover

In addition, you should have a fair idea of the amount of cover required. With Public Liability insurance, for example, $10 million is a standard amount, but $5 million or $20 million are sometimes required.

A final word

Australia isn’t really a nation of small businesses, it’s a nation of micro-businesses. This is a wonderful sign for our economy, but the risk is that vast tranches of the business community are trading without first catering to their insurance needs. The key for sole traders and micro business owners is to find out what those needs are, and shop around for a provider that can meet them.

If you’re a small or micro business on Oneflare, insurance is important for you to have to perform jobs safely and without risk. It’s about being protected from any possible situation that could leave you out of pocket. If you haven’t already, upload a copy of any licenses, certificates and proof of insurance that you may have onto your Oneflare profile.

Categories
Automotive

How to finance a car loan when you’re self-employed

Purchasing a new car isn’t something everyone manages outright. Throw self-employment into the mix, and the challenge can be harder.

Variable income and unpredictability often make securing finance feel out of reach. But that’s not the case. If you’re self-employed or an owner of a micro-business, there are options to secure a car loan that doesn’t break your bank.

Now with times more uncertain than before, it pays to invest and choose wisely. Here’s how you can increase your chances of successful car financing. 

Interior of a red ferrari with white leather seats and black steering wheel.
Source: Creative Car Care

Prioritise loan type

One of the most common financing mistakes is falling in love with the car before the loan.

You wouldn’t buy a house without sorting the paperwork, and your vehicle buying strategy should follow the same rule.

If you want to save money, seek pre-approval first and understand how different types of car loans work. This helps you budget, compare and approach the right lender for your needs and is the smartest way to determine what you can afford. Apply this strategy whether you’re shopping new, used or private.

Make sure you:

●  Review interest rates, fees, charges and repayment frequency to work costs into your budget

●  Prioritise your credit score to confirm your current financial position

●  Shop for car financing before you visit car dealerships

Tip:  Be careful not to apply for too many loans in a short period of time as this impacts your credit report and may decrease chances of approval. 

Research, compare and negotiate

Will you be leasing or buying your car?

The type of loan you choose depends on your business needs. Consider the purpose of your car, budget and whether you need to keep its ownership. Research and compare at least three loans from various lenders before you decide.

If buying outright isn’t for you, leasing enables you to get a new car with low monthly repayments. But it still pays to do your research first to compare and strengthen negotiating power.

Pre-approval of car finance also improves your negotiating influence.

Consider potential tax benefits

Buying a vehicle for business is a great tax advantage.

You may claim your car against business tax with a registered ABN. Generally, leasing means you won’t pay GST.

If you’re GST registered, the tax is charged on the purchase price which you can claim back when you lodge your statements. Depending on the type of car you’re after, see if you’re eligible for the Australian Government’s instant asset write-off. This only applies to new and second-hand cars under $20,000.

Minimise lender risk

There are a few ways to minimise the lender’s risk, which could improve your chances of approval.

  1. Have a substantial deposit
  2. Get your credit score up to scratch
  3. Keep balance sheet to prove business growth, profit and equity 

Weigh up features and restrictions

Every contract will have its own set of benefits and loan restrictions.

Before you sign, review the fine print. Sometimes, there are features to fuel savings like additional warranties and Guaranteed Auto Protection (GAP) insurance. Optional extras such as maintenance plans, GPS navigation and car alarm installation may sound good, but verify they’re meeting your needs and not adding to the total costs unnecessarily.

If there’s a chance you’ll pay your loan out early, look for flexible payment options and smaller payout fees like a chattel mortgage. These are favourable for self-employed individuals or tradies.

Buyer Beware: Not all features are what they seem. For example; some extended warranties are only valid if you return to the same dealership for servicing, which could end up costing you more. Remember it’s a car salesman’s job to upsell features, so it’s important to know what you’re really getting and if it’s worth your money.

Partner with a financial advisor

Partnering with an accountant or financial advisor is a wise move to determine all options and tax benefits.

Whilst it’s always vital to do your own research, a financial advisor provides knowledgeable guidance, so you find the best loan, lender and deal for your industry. These professionals have access to a network of financiers to save you the hassle of negotiating with each. Such savings in time and energy are valuable when you’re self-employed or a small business owner.

Flexibility, simplicity and clarity are the essential ingredients for anyone who is self-employed and looking to apply for car finance. The right loan will assist in the growth of your business, by ensuring access to the transportation you need.