The Difference Between Investments and Acquisitons

Ken and Barbie would like to build an investment portfolio and possibly reduce their tax. They have some savings but want to keep them as a buffer. Instead, they take out a line of credit against their home for $200,000 and make one investment each.

Barbie is a beautician. She decides to put her strengths to good use and purchases a weatherboard property. She uses her $100k as a deposit, gives the property a face lift, increases the rent by 10% and rents it out shortly afterwards. By the time she settles the property is 100% financed.

Ken is an environmental scientist. He links up with his brother and they purchase a block of land on the South Coast. They want to build an eco friendly house, trade mark the design and then sell the dsign for a motza to thousands of climate change believers.

Due to council approvals, endless meetings with architects and lawyers specialising in intellectual property, construction is not due to commence for at least eighteen months.

Ken also uses $5,000 to buy some shares in a software company called skyrocket.com. The shares do not pay a dividend.

All is going well until they lodge their tax returns. Their accountant informs Ken he cannot claim any deductions on his investments. He is confused and doesn’t understand why Barbie’s investment is ok.

Their accountant explains to Ken that Barbie’s rental property is an investment while his block of land and shares are both acquisitions.

“So what’s the difference?” Ken asks

“In simple terms, investments are income producing. They put money in your pocket. E.g. dividend paying shares and rental properties”.

“Acquisitions are non-income producing and generally take money out of your pocket”. E.g. a block of land. Your shares are also acquisitions because they do not pay a dividend”.

Therefore, the expenses associated with an income producing asset are tax deductible while for an acquisition they are not.

Investments feed you, acquisitions and liabilities eat you.

This information has been prepared without taking into account your objectives, financial situation or needs. Before making a decision based on this material, you should consider its appropriateness in regards to your objectives, financial situation or needs. You should seek advice about how the relevant laws impact on your particular circumstances. Suncow Wealth Pty Ltd is a Corporate Representative No.441116 of AFSL 393254.