Gearing into international shares
Overseas sharemarkets are becoming increasingly accessible to retail investors, both direct shares and managed funds. Investors are becoming aware that although they may have a well diversified portfolio across Australian assets, Australia represents only 1% to 2% of world sharemarket value. As a result, more brokers and financial advisers are recommending that clients consider international shares and managed funds as access to these securities becomes cheaper. Those with a geared portfolio that includes exposure to international shares and / or managed funds may or may not be aware of the limitations of interest deductibility of loan interest that relates to income earned from international shares. The general rule is that you cannot negatively gear international shares, ie. the excess interest expense is deferred to next year instead of being offset against other income. While this has been a source of confusion for some, the limitations on interest deductibility are not as severe as first thought. Firstly, income distributions from international shares are generally quite low when compared to that of Australian companies. This is largely because most other countries don’t have a system of dividend imputation protecting income from shares from being taxed twice. Gearing levels can be managed and where separate asset classes are held, the international shares can be used as security for borrowing to invest in Australian shares. The result is that there’s a relatively small chance that interest costs won’t be deductible in the current income year.