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[MoreMore Insights] Negative Gearing

Australia is one of the few countries implementing negative gearing. If you plan to invest in Australian properties, or are interested in the Australian property market, then you can not miss the following information.

What is Negative Gearing?

In an investment activity, related losses can be used to offset the taxable income in the same financial year, so as to save tax. Such a tax subsidy system is negative gearing. Taking investment property as an example, the Australian Taxation Office considers owning an investment property with rent as a business activity. When the rental income cannot maintain all the expenses of the property, including agency fees, water and electricity fees, maintenance fees, bank loan and so on, the gap between expenditure and the income can offset with taxable income, thus reduce the tax payable.

Benefits of Negative Gearing

Negative gearing is not a tax, but a preferential tax system, which can bring benefits to investors. For example, if an investor owns a new property that the rental income is greater than the total expenses, investor will obtain positive income in cash flow. But if this property is new, there will be depreciation, which ATO counts as an expense. So it still can offset a part of tax even when the rental income is good and property value is increasing.

Avoid Negative Gearing Trap

Many investors do not have a comprehensive understanding of negative gearing, and are fascinated by its benefits. Therefore, in order to get negative gearing, they choose a new property with the largest depreciation to obtain tax rebate, or choose a second-hand property with low rent in good location to deduct tax through actual losses. But in fact, these ways may not be desirable. The construction price of a new property is higher than of a second-hand property, so second-hand house’s land value and return are higher than new one in the case of the same property price. As for second-hand housing with poor rent, investors actually lose money in exchange for tax benefits. It is not a good investment, as it's sole purpose is tax deduction instead of returns.

Should We Use Negative Gearing?

Negative gearing can reduce taxes for investors, but it might impact capital gain tax when selling property in the future, so many investors are hesitant about using negative gearing. Investment properties held for more than one year can enjoy a capital gain discount under the ownership of individuals or trusts. Get professional tax advice if needed.

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