So what is negative gearing, and how can it benefit you?
When it comes to your tax affairs, you need to think beyond just completing your annual tax return. Our Bookkeeping & Accounting services ensure that you have all the necessary insights to make informed decisions.
We have written about a few tax topics that we think a property investor (or would-be investor) needs to know about. Click here to download a free fact sheet for property investors or choose a topic from the table below.
Our Bookkeeping & Accounting services include:
So what is negative gearing, and how can it benefit you?
Gearing is where you borrow to invest in an income-producing asset, such as property. Most property investors will borrow to buy a property. Negative gearing occurs when the cost of borrowing exceeds the income from the property.
When your rental expenses exceed your rental income, this creates a net rental loss. This loss reduces your taxable income, and a lower taxable income means a lower tax liability. The tax benefit that this loss creates is only a percentage of the net rental loss, depending on the investor’s marginal tax rate (see the table below).
For example, a taxpayer earning $30,000 has a marginal tax rate of 16.5%, so a net rental loss of $1,000 provides a tax benefit of $165. For a taxpayer with income over $180,000, the benefit would be $465. Therefore, negative gearing is more advantageous for higher-income earners.
It is important to remember that even though a tax loss increases your refund, a loss is still a loss—your investment is costing you money. This means a negatively geared rental property is only a profitable investment if the capital growth exceeds the sum of the losses incurred over the period of ownership.
With our Bookkeeping & Accounting services, we can help you navigate these complexities to optimize your investment strategy.
It is critical to be able to evaluate whether your property is profitable. See our separate post on this topic.
Marginal tax rates 2010-11
| Taxable income | Marginal tax rate |
|---|---|
| 0 – $6,000 | Nil |
| $6,001 – $37,000 | 16.5% |
| $37,001 – $80,000 | 31.5% |
| $80,001 – $180,000 | 38.5% |
| $180,001 and over | 46.5% |
Property investors have several choices of ownership structures
Sole owner, co-owners, trust, or super fund? Here are the pros and cons of some common structures for property ownership, along with the importance of effective Bookkeeping & Accounting practices.
| Structure | How does it work? | When is this structure used? |
|---|---|---|
| Sole Owner | The owner declares all rental income, deductions, and capital gains through proper Bookkeeping & Accounting. | Works well when one partner in a couple has a higher tax bracket and wants to take advantage of negative gearing. |
| Joint Tenants | Joint ownership in equal proportions, with all income and expenses managed through Bookkeeping & Accounting practices. Upon death, the surviving partner takes ownership of the property. | Only suitable for related couples due to estate planning implications; not advisable for business partners. |
| Tenants in Common | Ownership can be split in any proportion agreed upon by the partners, with all financial details tracked through Bookkeeping & Accounting. | Ideal for unrelated joint investors (e.g., business partners) and related couples wanting to split ownership unevenly (e.g., 80/20 or 60/40). |
| Unit Trust | A trust owns the property, and the investor owns units in the trust. Accurate Bookkeeping & Accounting is essential for managing these investments. | Used when an investor wants to combine asset protection with negative gearing benefits. |
| Self Managed Super Fund (SMSF) | Property is purchased using your current super plus borrowing if needed. Borrowing must be on a limited recourse basis. Bookkeeping & Accounting plays a crucial role in tracking these transactions. | Best for investors aiming to save for retirement or small businesses looking to buy their business premises. See our article on using super to build your business. |
| Company | A company pays tax at a flat rate of 30%. Investors are directors and shareholders in the company, with Bookkeeping & Accounting essential for managing company finances. | Not suitable for negative gearing, and there is no 50% discount on capital gains, making it a poor structure for owning real estate. |
For a clearer understanding of these structures and the role of effective Bookkeeping & Accounting in managing your taxes, our Bookkeeping & Accounting services can provide personalized advice tailored to your situation.
