A negative gearing calculator can help demonstrate why investment decisions should never be driven solely by tax considerations, even though income tax and capital gains taxes form a significant component of investment performance.
This is especially so when an investment is financed by a loan, with the increase in risk that that involves. Hence the importance of measuring the tax and cash flow outcomes of investment decisions.
Despite the offsetting tax benefits, “negative gearing” has never been the automatic road to riches some would have us believe. And since the downturn in investment markets in recent years, inflation doesn’t so easily hide investment mistakes any more; there’s much less room for error.
Smart investing is all about the balancing of risk and return. When you make an investment, you are guessing the future returns, with a risk of getting it wrong.
Simple spreadsheet negative gearing calculator – cut to the chase
One technique we’ve used to compare investment proposals which have a loan element, is to put different sets of assumptions into our negative gearing calculator spreadsheet, to project results. With this we control the risk and return assumptions to find a level of comfort, before spending the hard-earned dollars.
This is a smart back-of the-envelope decision tool. It’s useful as a fast guide to the financial arithmetic involved in a geared investment decision, where the investment costs are tax deductible.
The spreadsheet is deliberately very simple, so that the cause, effect and projected results can be very clearly understood, without clouding the issue with technical fine tuning, or minute analysis of arcane tax provisions which don’t have a major impact on the outcome.
The spreadsheet can be useful to evaluate the effect of any tax-effective leveraged investment, such as shares, property, rental property etc.
The negatives? If you enjoy number-crunching and want to track individual expenses in detail with 100% precision, link to the stamp duty calculators in 7 states and territories, and calculate the decline in value deductions for multiple types of asset – this spreadsheet tool is not for you.
- The calculator assumes you have a reasonably well-informed idea of broad income and expense profiles, and prefer a fast-but-good estimate over a slow-but-highly-accurate kind of analysis.
- The spreadsheet is basically a single investor, single investment model
- it works on current year tax rates, and doesn’t take into account future tax changes or changing inflation levels
- the effect of CGT is simplified by entering a single percentage rate assumption; there is no detailed breakdown of potential CGT outcomes.
- loan funding is factored on an interest-only basis
Overall? Speed and simplicity. And for advisors, it’s a simple one-page colour report which can be handed to a client or filed as a working paper.
Note: This spreadsheet calculator is based on 2012-13 tax rates which are also applicable to the 2013-14 financial year.
The simple Negative Gearing Spreadsheet calculator is a convenient way to assess risk and return, because all the important assumptions can be entered quickly. Loan funding – being one of the most important risk factors – can be easily manipulated to estimate outcomes – positive, neutral or negative.
The spreadsheet is built in MS Excel versions 1997-2003 or later (Windows only, sorry Apple versions not supported.)
Get the spreadsheet Negative Gearing Calculator ($1.97) here:
The spreadsheet will be sent to you within 24 hours.