Negative Gearing
Property investment in Australia offers additional advantages other than just capital growth for anyone paying taxation to the Australian government. The costs associated with the property can be offset against the income produced from the property. If this results in a loss, the amount of the loss can be offset against taxation due on income from other sources. This is generally referred to as “negative gearing”.
The reality is that to go into an investment property to make a loss is not a good business strategy, unless that loss can be offset against gains somewhere else. Investors undertake this method of investing on the basis that capital growth will more than offset any losses incurred and this has been the case over many years. It should be stressed that property investment should be looked at in the long term as short term fluctuations may not result in any capital growth. Any profit made on the sale of an investment property is subject to capital gains taxation, but that is another topic.
Example.
Negative gearing and how it applies to residential property. Basically if a rental property has greater costs or outgoings than income, the difference can be claimed as a taxation deduction off income from other sources. The following example will help explain.
Investment property bought for $350,000, deposit of $50,000.
| Costs. | |
| Mortgage of $300,000 interest of 7.5% Cost/annum. | $22,500 |
| Shire rates, water rates and body corp fees, | $ 3,000 |
| Maintenance & repairs | $ 1,000 |
| Total outgoings | $26,500 |
| Income. | |
| Rental income $300/week minus management fees. | $13,500 |
| Loss prior to taxation. | $13,000 |
Depending on the rate of taxation, currently in Australia the highest rate of taxation is 48.5% (47cents in the dollar plus the medicare levy of 1.5%) this results in an actual cost of $6,695 (after the tax refund) to the investor.