What is 'good debt'? What is 'non-deductible' vs 'deductible' debt?
That’s an easy one there is no good debt…. no seriously, when has any type of debt sat comfortable with you? In fact, at Heart nearly all of our clients list debt as the number one fundamental need they need to have under control before they will consider addressing their unmet desires and outcomes.
However, from a tax perspective yes there are two types of debt. The worst of the bad is non-deductible debt. Your home loan is the non-deductible most of us have. This is debt that you pay down and receive nothing back in terms of tax deductions.
Non-Deductible debt – think Investment debt here. Debt used to purchase an income producing assets, for example an investment property that is rented out. The Australian government allows this interest on borrowings to be of set against taxable income, the result is reducing taxable income. Of course you must be paying tax to incur any of these deductions. Whilst this may seem obvious I do see people with deductible debt held in the non-working spouses name. No tax paid no tax reduced….
So whilst there are many advantages of ‘good debt’ you should first factor in the costs and worst case scenarios as the debt only works at tax time if you can afford the payments and can hold through the investment cycle or timeframe you mapped out to reap the rewards of the risk you have taken.
In preparing in this article we have not taken into account any particular persons objectives, financial situation or needs. Investors should, before acting on this information, consider the appropriateness of this information having regard to their personal objectives, financial situation or needs. We recommend investors obtain financial advice specific to their situation before making any financial investment or insurance decision.