Negative gearing has resurfaced in the headlines. But what exactly does it entail, and could it impact you? Let’s break down how negative gearing works, why it’s popular among property investors, and why it's once again under scrutiny.
Australians have a strong affinity for property investment. In fact, over one in ten adults (around 2.26 million Australians) own investment properties.
So why is property such a popular choice for investors?
First, landlords earn consistent rental income, which helps cover the investment loan repayments. Secondly, Australian property prices have historically risen, with national values increasing by an average of 10.9% per year over the last century, according to AMP Insights. This makes property a potentially profitable long-term investment, particularly when the owner sells and may qualify for a 50% capital gains tax (CGT) discount.
But there’s another advantage that makes property investment even more attractive: the tax savings offered by negative gearing.
How Negative Gearing Works
'Gearing' refers to borrowing to invest, while 'negative gearing' occurs when the costs associated with owning a property—such as loan interest, council rates, and insurance—exceed the rental income it generates.
The property owner can then claim this loss on their tax return, even if the property’s value has increased. The key benefit of negative gearing is that these losses can be offset against other income, such as your regular salary, which can result in tax savings.
The Potential Tax Benefits of Negative Gearing
Let’s take a look at a simple example to illustrate how the tax savings can work.
Suppose Deb earns an annual salary of $125,000. Based on the 2024-2025 tax rates, she pays $28,288 in tax, including the Medicare levy.
Deb has recently purchased an investment property. It generates $25,000 in rental income, while the ongoing costs (including strata fees, insurance, and loan interest) amount to $35,000 annually. This leaves her with a $10,000 loss on the property.
Deb can claim this $10,000 loss on her tax return, reducing her taxable income to $115,000. As a result, her tax bill (including the Medicare levy) drops to $25,288, saving her $3,000 annually.
This tax saving can be used to help repay the home loan for the investment property.
Why Negative Gearing is Controversial
One point of contention surrounding negative gearing is that while property owners may claim losses, many investors are unlikely to be making a real loss. Property values tend to rise over time, leading to potential capital gains when the property is sold. However, these capital gains are usually subject to capital gains tax (albeit often discounted at 50%).
Why Negative Gearing is Back in the News
Negative gearing has attracted attention once again due to recent comments from Federal Treasurer Jim Chalmers, who requested Treasury to model the impact of negative gearing on housing supply. This comes despite Prime Minister Anthony Albanese stating that there were "no plans to change negative gearing."
Nevertheless, in the ever-changing landscape of politics, nothing is guaranteed. Still, it would take a bold government to alter a policy that affects over 2.2 million property investors—about half of whom utilise negative gearing.
Interested in Becoming a Property Investor?
If you’re considering purchasing an investment property, it’s always wise to consult a tax professional to determine whether negative gearing could benefit you. While around half of property investors take advantage of this strategy, it may not be suitable for everyone.
Regardless, if you’re looking to invest and need guidance on financing options, reach out to us today. We can help you assess your borrowing capacity and explore how leveraging the equity in your current property might make your investment goals a reality.
Whether you're in Townsville, Brisbane, Gold Coast, or Sunshine Coast in Queensland, Australia, our team of experts can guide you through the process and connect you with the best mortgage broker for your needs. If you're also considering refinancing in Townsville, Brisbane, Gold Coast, Sunshine Coast in Queensland, Australia, we can provide insights to help you make the best decision for your investment journey.
To learn more, contact Premium Finance Group Australia at (07) 4720 8888 or email us at finance@pfga.com.au.
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