If one pays 10% of the cost price and borrows the rest, the gearing is 10 to 1.

         Making Big Capital Gains:                       Buying at the bottom of a market and selling out at high can make one a lot of money using borrowed money. So you have to pay Capital Gains Tax (CGT) on the profit. 

        If you don't know how to minimise Capital Gains Tax you are known as a financial fool (who is soon parted from his money)

        Making Big Capital Losses:        However, if one buys at the top of the curve and are forced to sell at the bottom one could not only loose one's 10% equity capital but the asset might have to be sold by the mortgagee. 

        Any loss on the borrowed amount would still have to be paid by the borrower.

        And that is not a very happy situation.

        The Family Home:                               Most family homes are Negitive Geared because most young people have to borrow to buy.

        Young People:                                  Young people buy a house and pay it off over many years. The interest paid over the lifetime of the loan might be five times the actual cost of the home.

        Go and get Stuffed:                                This keeps them relatively broke so that they have to keep working to pay off the mortgage. They cannot tell the Boss to go and get stuffed.

     Their Choice not to claim a Tax Deduction:             That is not so bad if they claim the interest as a Tax Deduction each year but some don't for some reason or other. Strange! But - it's their choice.

        Doing Business: 
        Once a Taxpayer has set up his Small Family Business Investment and has learned how to TaxPlan as a Business Person, rather than as a PAYG Employee, it's time to consider investing in Real Property.

        Business Perks:
        His well researched and established Small Family Business allows all members of the Family to have an Income, Superannuation, Tax Deductible Business Travel - Locally, Interstate or Overseas - together with Sport Sponsorship, etc.
 
        The Unforeseen:
        This will allow for any  family member to have an unfortunate accident or a redundancy with minimal loss of Income - or the trauma normally encountered by Working Class Employees.

        Tax Effective Business:
        His Business Income producing Assets (Vehicles, Computers, Office Equipment etc.) are tax depreciating. His Business Loan Interest is tax deductible and tax effective Superannuation is "saving" profits for retirement. Efficiently, he is in control of his own and his family's future Income and Wealth.

        Take a Break:

    Gearing or Leverage:
    Gearing is an engineering term (as in gearbox of your car) It is used in creating a "mechanical advantage" similar to a lever (each gear tooth is actually a lever). 

      A lever then works by moments. That is to say if you have a lever like a kids see-saw and if you place an adult and a child at either end then no doubt the adult would go down and the child would be lifted up. 

      If the adult moved closer to the fulcrum (pivot point) at some time both the child and the adult would balance the see-saw. It is the function of both mass and distance from the fulcrum that gives the lever the mechanical advantage. 

     The torque Force x Distance (N x m) = Nm. (a Newton Metre identifies torque - rotational work. A Nm can also be substituted by J (Joule) the unit for work (in a straight line) 

      If the child stayed at the end of the see-saw and the adult moved past the point of equilibrium, the adult would be lifted. Galileo said that, with a long enough lever, he could move the moon. 

      A 10Kg mass on a lever 10metres long could lift a mass 100Kg on the other end of the lever 1metre from the fulcrum. Mechanical advantage = 10 (or 10 to 1 as the ratio).

       In finance you can use $10 to control $100 ---- leverage = 10 or 10 to 1 ratio. Providing the market is rising or there is some other financial advantage.

                                                                                Negitive Gearing:

        Negative Gearing is used in a situation in the Creative Business Class environment. The Taxable Income from the geared asset (rental property, stock or small business) is less (negitive) than the Tax Deductible Costs incurred in producing that otherwise, Taxable Income. 

       If displayed graphically/mathematically with a time period on the X component the line would project into the positive+ but negative- quadrant (right side bottom side) on the Y component.
        The Business would be considered as "going backwards" while still going forward in time. Consider a vehicle trying to go backwards - negative - up hill on a loose dirt road - using "energy" skidding but getting no where in time so no "work" type power is involved.

       [The Critical Economics of Adam Smith was based on what he saw Creative Scottish Engineers doing manufacturing simple pins. As a consequence, he uses engineering concepts and pure maths to prove his rather impure Critical "Science"]

        If you consider the AC (alternating + to - electricity) Sine  Wave - invert the negative flow so leveling the crests. Then the mean or average pressure is equivilant to 240 volts (DC) rather than "somewhere" between the top of the wave and zero. You have filled in the hollows.

        In "Negative Gearing" a Business, you fill in the hollows or losses from some other Taxable Income. If it is a PAYG Income involved you can use an Australian Tax Office official s221D PAYE Variation Application to level the losses weekly rather than a one off big surge Tax Refund.

        So now you know - for what it's worth - that the Critic, Adam Smith, was a Thief of Ideas of the great Creative Scientists like Newton - the Father of Croquet. If you now know "Negitive Gearing" you have a non-taxable bonus.

     NB All Small or Micro Family Businesses are Negitive Geared for the first 3, 4 or 5 perhaps 10 years

   NB.

  For Information on Taxation don't hesitate to check with the Australian Taxation Office Web Site:

       www.taxreform.ato.gov.au

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       (1) Professionally Managed and Maintained
       (2) Family Managed and Maintained.

        The value of each is important in TaxPlanning as indicated in the TaxPlanning Seminars

        Using Tax Planning Vehicle:
       (3) As "Sole" Business Proprietor
       (4) Family Partnership (*sans children)

        Non Personal Tax Minimiser?
        If the Investor is in no need of "Income Losses" to minimize his own PAYG Tax - with the use of an ATO s221D PAYE Variation - he could consider:-

      (5) Discretionary Family Trust (inclusive of children)
      (6) Private Family Company (*limited shares for children)
      (7) Unit Trust

        [*Tax Planning looks at all possible predicaments with legal instruments in place to ensure damage control of the planned family wealth. It could all be lost within the time frame of less than one  minute.

        An Example for Managed Property:
        People choose rental property as a safe means of achieving future income and retirement goals. You can see and touch what you own and over the years it will increase in value - a "Capital Gain".

          Unlike Market Shares it is not totally dependent on management capabilities, product mix, laws of supply and demand, international competition, currency fluctuations, and control - or embezzlement.

       Managed Property is an non-time consuming Investment allowing quality time with a growing family and the operation of a Small Family Business.

        Property Selection:
       The selection of the property, its location, type; the structuring of finance, the insurance policies, the tenancy type, the ongoing management and maintenance of the property, the legal, accounting and taxation inputs will all have a bearing on how much wealth the property will create for the investor.

        The Professionals:
        This is undertaken by Professional Property Managers who are committed to the pre purchase planning and research process needed to ensure the Investors success. This is to maximize profits, minimize the risks - while enhancing the Property Managers' good name.

        Safest and Quickest:
        There is no doubt that a well understood Investment into Negatively Geared  *Rental Property, together with an easily operated Small Family Business with it's Tax Advantages, Travel Expenses, Superannuation, Sponsorship and Insurance capability is the safest and quickest way to accumulate large amounts of Tax effective, Family Wealth. 

     Take another Break:
      Negative Gearing is an Economists buzz word as indicated in the last break. In Tax, "Negative Gearing" is used where ever you see [  ] on the ATO TaxPack Supplement. However, the Rentable Real Estate Industry has adopted the buzz words to "influence" property buyers with it's connotation.

        The Individual Tax Return does not recognise "Negitive Gearing". Instead, in this mode, the situation is covered by "Rent" - Income or Loss - and is filed at Item 16 in the TaxPack Supplement.

         Warning! Recently, a very talented Real Estate Agent with very little knowledge of TaxPlanning forgot to tell his CPA Accountant of the tax deductions related to his NG property. He thought the person doing his accounts had a crystal ball and saw everything involved with his accounts. The actual person doing his simple bookkeeping was probably a teenage clerk. Had the Agent not been reminded of the deductions he would have lost more than four times the cost of the Seminar.

       Last Will and Testament:
        Even the legal apparatus can be put in place to enhance the Last Will and Testament to ensure the best transfer of family property to the Beneficiaries in a Testimonial Discretionary Trust. This would help to minimize Capital Gains Tax, high marginal tax - and possibly other unsatisfactory and or unknown, "de facto" beneficiaries.

        Dual Income Earners:
        Negative Gearing is the preferred option for Dual Income earners (No Kids) "DINKs" - with a comprehensive lifestyle - including their own Business Travel, Locally, Interstate or Overseas - and possibly Tax Deductable Sponsored Croquet Participation.

       Example:  
        High demand, brand new properties, two and three bedroom with ensuite are situated on small maintained blocks near a major lake. Area has a future high demand for Flag Lieutenant Flagpoles
so to employ the tenants if needed - and ideal for retirement.

        The Price?
       Prices $137,000 to $165,000 each.

        The Cost?
        Negative Geared? Less than $10 per week out of pocket for an investor on $50,000 net PAYG per annum - (Tax $14,000/a)

        The Down Payment:
        This and others can be acquired with an initial outlay of about $250 and a weekly cost as low as $0 and up to $40 (depending on your taxable income) Whereas, the tenant and your Tax Refunds, together, cover the majority of the costs including the interest.

       Capital Gains:
        Good rental property doubles in value every eight years - well ahead of inflation. If Capitalised due to accident or redundancy etc. then tax losses planned, using the initial Flag Lieutenant Business Investment, will be able to handle Capital Gains Tax problems.

        Not Tied Up:
        Unlike with tied up Superannuation and Long Term Investment, Business Loans could be established, using the Equity in the Property Investment, to acquire more Investment Properties etc.

        Why Tax Plan:
        Tax Planning is the prerequisite for creating Family Wealth.
 
        And the bottom line - Family Planned Insurance:-

        Family Law Court Trauma:
        As 40% of marriages fail, the Family Law Court could hardly award one spouse two houses and half of both Superannuation Investments - so only the Childrens' welfare is at stake.

       The Best Reason for a Small Family Business:
        But both parents have a Small Family Business - together or apart - to employ the kids on Tax Deductible Incomes rather than non- Tax Deductible child maintenance.

        The child maintenance can be as high as 30% of the gross income of the non custodial parent.

        A far better resolution?        TaxPlan!