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You can start smallDiversification opportunities
Liquidity
Gearing and tax implicationsManaging the risk of a margin call
Unlike investing in residential property, you don't need to borrow large sums of money to start (or build on) you investment portfolio.
Diversification is a sound strategy for reducing investment risk. By having more to invest, you can potentially diversify your portfolio and spread your exposure across a wider variety of investments.
Liquidity
If you need access to your funds, you can generally sell your assets to assist you in managing your cash flow requirements should you require funds for other purposes.
Gearing and tax implications
Using margin lending to gear your investments may generally have the following tax consequences:
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Explanation |
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Tax deductible interest
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The interest you pay on a margin loan may be able to be claimed as a tax deduction. Furthermore, if the interest (and other tax deductible costs) exceed the income from your investments (including franking credits), you may be able to offset these costs against other sources of assessable income. |
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Tax implications of interest payments
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For a fixed rate loan, you have the ability to pre-pay interest on your margin loan for up to 12 months. This allows you to bring forward an expense that may otherwise be tax deductible in the following financial year. This additional tax deduction may then be used to reduce your taxable income in the current financial year. It is important to note that this may be subject to the special pre-payment rules and you should seek professional tax advice. |
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Capital Gains Tax
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By borrowing against existing assets, you may be able to take advantage of other investment opportunities without triggering a Capital Gains Tax (CGT) liability. This is because you don't need to sell your existing investments to use them as security for your margin loan.
You may then be able to sell your existing (and your geared) investments at a time when your marginal tax rate is lower (e.g. in retirement). This can potentially help you to reduce or eliminate the CGT payable.
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Franking credits
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If you invest the borrowed money in Australian shares and certain New Zealand shares, directly or via a managed fund, you may be entitled to valuable franking credits. Depending on your personal circumstances and subject to the 45 day holding period rule, these credits may be able to be used to offset some (or all) of the tax payable on the dividends or distributions. |
Managing the risk of a margin call
Buffer limits and margin calls
When the security value of your investments is more than your outstanding loan balance, your Margin Lending Facility is operating within its limits.
In a situation where your outstanding loan balance is greater than the security value of your investments, we allow a 'buffer' (generally between 5% & 10% depending on the types of investments you hold) so small fluctuations in values do not result in a margin call.
When your outstanding loan balance is greater than the security value plus the allowed 'buffer' amount, your Facility will be in a margin call.
Reducing the risk of a margin call
To reduce the risk of a margin call you can:
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Gear conservatively and borrow less than the maximum available
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Diversify your portfolio across a number of industry sectors and companies
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Make regular interest payments and don't capitalise your interest
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Monitor your portfolio and loan balance frequently
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Reinvest the income from your investments
While a margin loan can increase your gains in a rising market, it can also magnify your losses when the market declines. We recommend that you speak to your financial adviser to discuss your investment strategy and financial circumstances when deciding whether or not to gear your investments.
More information about managing a margin call and managing general investment risks is detailed in the Learning centre.
About NAB Margin Lending
How does NAB Margin Lending work?
Key benefits and risks of gearing using margin lendingHow much can I borrow?Interest rates and feesApproved Investment ListApply nowLearning centreNAB Margin Lending homepage
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