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    what you need to know

Gearing can be an effective, tax efficient long-term investment strategy. On one hand
it lets you invest more and earn more. On the other hand, there are risks involved.
This leaflet explains the pros and cons of gearing your investments.

What is gearing?                                                       Margin lending
Gearing is borrowing money to invest. Just as you take out a           A margin loan is a way to borrow up to a set percentage
loan to buy a family home, you can borrow money to invest in           value (typically between 50%-70%) of selected shares and/or
other assets, such as shares, property, or managed funds.              managed funds. The initial investment can comprise cash,
                                                                       approved securities (such as shares and managed funds) or a
Why would you do this? Because it gives you the opportunity            combination of both.
to invest more money and if the investment performs well, you’ll
enjoy potentially greater returns. But if the reverse happens          Geared unit trust
and there’s an investment downturn, the more money you
have invested the more you stand to lose…and you’ll have a             A geared unit trust (also known as a geared managed fund) can
loan to repay.                                                         be an effective way to establish a geared investment. Unlike
                                                                       other managed funds, the product manager uses the assets
Interest paid v interest earned                                        held within the unit trust as security for borrowing. The trust is
                                                                       then geared at a pre-determined level and the product manager
Gearing may be classified into three levels – positive, neutral and    is responsible for all issues surrounding the borrowing.
negative, based on the interest you pay on the loan, compared
with the interest you earn on your investment.                         If you decide to invest in a geared unit trust, your liability will be
                                                                       limited only to the amount you invested within the trust.
Say you invest $50,000 in a managed fund of which $50,000
is borrowed. The interest on your loan is 8% pa or $4,000              Gearing can help reduce the tax you pay
in repayments.
                                                                       As well as having the potential to make money, gearing can also
Here are three different scenarios:                                    reduce the tax you pay in three ways:
• Positive gearing – if the managed fund produces income of            • Interest payments may be fully tax deductible
  $4,500 you will enjoy a net gain of $500
                                                                       • Share investments may attract imputation credits
• Neutral gearing – if the managed fund produces income of
                                                                       • Under negative gearing any losses incurred may be used to
  $4,000 there’s no net gain or loss
                                                                          reduce your assessable income, and your overall tax.
• Negative gearing – if the managed fund produces income of
  $3,500 you’ll see a net loss of $500                                 What are the main benefits?
Ways to gear                                                           Gearing provides the opportunity to:
                                                                       • Increase your investment potential – by gearing you’re
The three main ways you can gear your investments are
                                                                         able to make larger investments than would otherwise have
set out below.
                                                                         been possible using just your own money.
Home equity gearing                                                    • Magnify your returns – in favourable market conditions
                                                                         you’ll gain greater returns.
Home equity gearing is borrowing against the existing equity
                                                                       • Reduce your overall tax – with negative gearing you can
in your home. This allows you to release capital tied up in your
                                                                         offset the shortfall between interest paid and earnings
home and use it to finance income-producing investments.
                                                                         received from the investment against other assessable
You can establish a home equity loan by setting up a redraw              income, reducing the amount of tax you pay.
facility within your existing home mortgage or by arranging an         • Gain imputation tax benefits – if you borrow to invest in
additional line of credit. These types of lending arrangements           shares, any imputation credits you may receive can be used
offer flexibility in terms of the loan and interest payment options.     to reduce the amount of tax you pay depending on your
                                                                         financial circumstances.
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What are the main risks?
Some of the risks of gearing include:
• Magnify your losses – in unfavourable market conditions,
  your losses could be greater.
• Increased interest rates – if interest rates go up, you may
  not be able to meet your interest repayments.
• Lower investment income – you may receive less income
  from the investment than you anticipated.
• Loan costs – you may incur penalties/fees on early
  repayment of the loan.
• Unforeseen events – difficulty in meeting your gearing
  payments due to illness or an accident. However, you can
  insure against these risks.
• Market downturn – if you have a margin loan, a severe
  market downturn could lead to a loss of equity in your home
  or a margin call. A margin call occurs when the loan exceeds
  the agreed maximum. You then have to add more money
  or more assets, or sell part of the portfolio and use the
  proceeds to reduce the loan to the agreed maximum.

  Your Financial Wisdom adviser can help
  If you want to know more about gearing talk to your Financial Wisdom adviser.
  They can give you more detailed information on what is best for your situation.

Important Information
This general advice has been prepared without taking into account your particular financial needs, circumstances or objectives. This advice is based on Financial Wisdom’s
understanding of current law, and is based on its continuance unless stated otherwise. While every effort has been made to ensure the accuracy of the information, it is not

guaranteed. You should obtain professional advice before acting on the information contained in this publication.
Financial Wisdom Limited ABN 70 006 646 08 AFSL No. 2338 is a wholly owned but non-guaranteed subsidiary of Commonwealth Bank of Australia ABN 48 23 23 24.

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