Good Debt Bad Debt: tips for Debt Management

— 8 min read

Most people see debt as a necessary evil, a means to an end. It has long been believed that to achieve the ‘Great Australian Dream’, we should only borrow to buy the family home and that debt should be repaid as quickly as possible. When in fact, it is not always the best strategy.

Instead, in some cases debt should be seen as a vehicle that can help you on your way to achieving your goals. When set up correctly, the different types of debt and appropriate structures available to you can provide many benefits now and into the future.

‘Good’ debt

It is possible to have ‘good’ debt. One of the key characteristics which differentiates good debt from bad, is its purpose. What have you borrowed the funds for? If it’s to purchase an appreciating asset or to fund an investment, this is considered ‘good debt’.

Another indicator of ‘good’ debt is its deductibility. Debts acquired to purchase investments (such as a rental property or portfolio of shares) allow you to claim a tax deduction for the interest and costs associated with the loan. Therefore, when working out the return on investment any reduction in tax payable should also be considered.

Some Australian taxpayers may need to obtain a loan to help fund tax bills and may be able to claim a deduction for the interest incurred on this debt.  However, specialist tax advice should be considered as borrowing to pay a tax debt is not always deductible.

‘Bad’ debt

There are some types of debt that you want to avoid altogether. Credit cards and personal loans are not desirable because the interest rate is often quite high and is rarely deductible. However, sometimes they are essential to finance the purchase of an asset or pay training program fees. In those cases, a loan specialist such as a DPM Finance consultant can help you find the best rate and put in place a repayment plan to ensure you are always putting your best foot forward financially.

Some non-deductible debt may be unavoidable, such as the loan on your main residence. This can be considered to be good debt for the simple fact that your home provides a roof over your head. Furthermore, your home should appreciate in value* and, by seeking advice around the structure of your home loan, you can ensure non-deductible debt is minimised.

Similarly, buying a car can be a significant financial decision. Should you use your savings to buy it outright or obtain finance for the purchase? If you aren’t using the car for deductible, work-related travel (Knowing your tax deductions is important) then this debt too will be non-deductible.

An alternative for those working in the public health system with access to salary packaging is to obtain a novated lease. In essence, a novated lease allows you to obtain a loan for the purchase, but, as all expenses are taken from pre-tax earnings, you are receiving a tax benefit. You should seek advice around the portability and duration of any lease. Remember, it is highly likely that your motor vehicle is going to depreciate in value from its purchase price.

Before you take out a loan, ensure you are getting the best product combined with the best structure by discussing your options with a DPM consultant who can help you make sense of your lending.

*The long-term historical median house price in Australia has increased per ABS Residential Property Price Index, accessed via www.abs.gov.au; past data should not be relied upon as an indication of future performance.

The information contained in this site is general and is not intended to serve as advice. DPM recommends you obtain advice concerning specific matters before making a decision.

Authors

Anthony Pane

CA, B. Comm

Consultant
Melbourne

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Anthony started at DPM as a Tax Consultant in 2015. He looks after doctors at various stages of their career with a customer-centric approach. His clients value his ability to guide them through their issues and provide them with personalised solutions for their taxation, structuring and salary packaging needs.