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Weekly Update: Invest Like the Rich

Dear Motley Fool Share Advisor Subscriber,

Before we dive into company updates and a follow-up on leverage, let’s take a look at what’s in the pipeline for Share Advisor members.

  • Our special report on how to value a company is now being edited and will be released next week. Whether you’re a share market novice or an experienced investor, this report has something for everyone. So stay tuned!
  • Our techies are currently building Ask The Fool, our new Question and Answer feature. We’re hoping to have a beta (preview) version available in the next couple of weeks. As we’re getting some wonderful questions from members, we’re sure this will be another great resource for you, our subscribers.
  • On Thursday, just before the Easter break, we’ll send you our latest free report titled Secure Your Future With 3 Rock-Solid Dividend Stocks. These three companies, whilst not formal Share Advisor recommendations, are strong candidates for the core section of your portfolio.
  • In case you missed it, we published an update on watchlist company, Collins Foods (ASX: CKF) last week.

In this week’s update:

  • Diving deeper in to debt — how to minimise tax on investment income and maximise the tax deductibility of interest.
  • Plus company updates on Integrated Research, QBE Insurance Group, Thorn Group, Industrea and

How to Invest Like the Rich

In last week’s Share Advisor update we wrote about the perils of leverage and shared Dean’s Ten Rules of Margin Investing. This week we’re going take a step back and look at the bigger picture of debt and, in particular, how to minimise tax on investment income and maximise the tax deductibility of interest.

As you know we’re equity guys. We’re passionate about investing in great companies and we’ll seldom stray far from talking about investing in shares. Today is one of the rare exceptions, as we try to put all our members on the path to investing just as the rich do. If the following ideas are new to you, then please do talk to your accountant or financial advisor about these opportunities.

Please note, as per the rules of our Australian Financial Services Licence, we cannot give individual advice.

Earned versus Passive Income

There are two types of income; earned income (salary and bonuses) and investment or passive income (interest, dividends, rent and capital gains). In general the passive income should be transferred to family members on the lowest tax rate.

This can be achieved via transferring the assets to other family members, joint ownership, or a family trust. The transfer can be done via a gift, sale or interest free loan.  As transfers must be done at market value, it’s smart to consider capital gains tax and stamp duty implications.

Deductible Versus Non-Deductible Interest

There are also two types of interest payments; tax deductible and non-tax deductible. Interest payments are tax deductible when you borrow for income producing or capital gain purposes, in investments such as shares, funds and property.

On the other hand, interest on mortgages (for your principal residence), personal loans and credit cards are non-deductible (can’t be claimed on tax).

The aim is to structure our finances to reduce or eliminate non-deductible interest payments. The key is to ignore the security or collateral for the loan and focus on the use of the funds.

Perhaps a quick example will help. Jack and Jill owe $300,000 on their principal residence and have $200,000 invested in shares. The interest on the principal residence is non-deducible and the income produced by the shares is taxable. It is possible for Jack and Jill to restructure their finances so they have a loan of $200,000 to fund their direct share investment and a $100,000 mortgage for their family home.

Nothing has really changed. Jack and Jill still owe $300,000, are still paying off their family home and still own $200,000 worth of shares. What has changed is that they can now claim the interest on $200,000 of the loan on their taxes to offset the income produced by their shares. This maximises their after tax position without changing their regular cash flows, debt level or risk they are taking.

In summary, make sure passive income is streamed to the lowest tax payer in your family and that you reduce the amount of your non-deductible debt. As we mentioned above, this information is only to give you a starting point as to some options which may be available to you. For details on how to do this – and whether it’s right for you – talk to your accountant or financial advisor.

Company Updates

Integrated Research (ASX: IRI) was one of six companies chosen as a finalist for Enterprise Connect Orlando’s Best of Enterprise Connect Award. Despite not winning the award, the exposure was valuable as Integrated Research (IR) showcased their unified communications solution to a lot of key decision makers.

IR was also chosen as one of the initial Avaya DevConnect Select Product partners. This further partnership helps cement what is a profitable sales channel for Prognosis. Our recommendation for IR shares remains a hold.

QBE Insurance Group (ASX: QBE) announced it had received subscriptions from over 75,000 retail shareholders for much more than the $150 million sought under the SPP. No surprise there! A scale back will be required and QBE will provide an update prior to the allocation of the shares on April 5. QBE will issue around 14 million shares at an issue price of $10.70. We still rate QBE a buy.

Thorn Group (ASX: TGA) closed on Friday equal with the share price when we made our recommendation back in our January issue of Share Advisor. Perpetual and IOOF were sellers during February, but since then there have been no major changes to the share registry. The sell-off could be due to nervousness around the retail environment or concerns that the ACCC may try to crack down on ‘rent-try-buy’ businesses. We’re maintaining our buy rating and continue to see excellent long-term value in Thorn.

Industrea (ASX: IDL) recently announced a $7.1 million sale of 4 x 55T roof support carriers (mining equipment) to China’s Yitai. We were pleased that CEO Robin Levison emphasised the recurring revenue that flows from these sales. “We are also building our service capability in our Shijiazhuang facility to accommodate an expected associated increase in orders for service and refurbishment from our large installed base of IME equipment in China which is now close to 150 machines. Given the very high utilisation rates of equipment in China, the service and refurbishment cycle is much shorter in China than Australia”.

As per last week’s update, we still rate IDL as a buy, although we’d like members to try and buy around $1.

Rounding out our ASX recommendations, Vocus Communications (ASX: VOC) remains a buy.

The market’s concern over’s (Nasdaq: AMZN) increased near-term investments in its business is keeping a lid on the share price, despite a stellar holiday season for the Kindle. This is precisely when long-term investors need to take advantage — because once their investments start to bear fruit (and we’re confident they will), today’s share price could be a distant memory.

Coming soon – Our Valuation Report, Ask The Fool, and More…

As mentioned above our valuation report will be available next week and our new feature, Ask The Fool, should be available soon after that. As with everything we do, the aim of these two member-only services is to help you invest better.

Keep an eye out for an email on Thursday with our latest free report, plus we’ll have a special update on a Share Advisor watchlist company whose share price performance continues to defy gravity.

Last week we told you we’re already hard at work on the May edition of Share Advisor. It’ll be published on April 26th and we’re trying something a little different. The issue will focus on just one sector: biotechnology. We’re very excited about the ‘potential’ of the next issue, and can’t wait to bring you our top Australian biotech pick. We’ll also showcase six other biotech and medical device companies that are on our radar.

Finally, due to Easter, the next weekly update will be published and emailed to you on Tuesday April 10.

In the meantime, if you have any questions or comments, we encourage you to email us at We thank you for your support.

Yours Foolishly,

Bruce Jackson and Dean Morel

Motley Fool Share Advisor

Disclosure: Bruce Jackson shares in Thorn Group, Vocus Communications and Apple. Dean owns shares in Integrated Research. Click here to view The Motley Fool’s disclosure policy.

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