Negative gearing is a term commonly used today, but what does it actually mean?
"Negative Gearing is the capacity to claim losses as Tax Deductions when there is an expectation that in the future Profits Will Be Made."
“When the costs of owning an income producing asset exceed the income from that income producing asset a loss is sustained. This loss can be offset against other taxable income to produce a tax refund.” In essence this is Negative Gearing.
Simply put we own an investment (Property) that has costs (Loan Interest, Rates, Management Fees etc); we also have income (Rent). When the costs exceed the income the investment is said to have a “negative” cash flow i.e. Money must be spent to own the asset.
“Gearing” refers to the use of borrowed money. Financial Gearing is defined as using a small amount of money to maximum advantage, i.e., using a little money to move/effect a much larger amount.
When structure correctly the costs of a negatively geared property are paid by the Tax Department, Your Tenant and the smallest actually amount coming from your own pocket.
Allowable tax deductions include;
- Deductions on Purchasing Costs (Tax deductible over 5 years)
- Valuation Fees
- Stamp duty on Mortgage
- Bank Application Fees
- Mortgage Insurance
- Consultancy Fees
- Depreciation Costs
- Building Costs (2.5% p.a. over 40 years)
- Fixtures & Fittings (as per tax schedule)
- Furniture (as per tax schedule)
- Inspection Costs (100% write off annually)
- Other acceptable costs (as per tax schedule)
Calculation of depreciable items is a very specialised field. MTF highly recommends the services of a Quantity Surveyor to ensure you maximise your depreciation deductions. (For more information on depreciation speak with our consultants)
Negative Gearing of investment property was introduced by the government of Australia as an initiative to encourage income earners to purchase investment property to enhance the availability of rental property and help ease the burden of people becoming dependant of the Government in their old age by helping them provide for themselves.
The main reasons behind the introduction of Negative Gearing:
Firstly, many industries within the economy rely on building and development. Not just people employed directly, but also factories etc. that make the products used by builders and developers (this factor has been emphasised recently with the Federal Government's introduction of the $14,000 first home buyers grant).
The second advantage to governments is the relief of pressure to supply and maintain housing for people who are not in a position to purchase their own home, thereby saving millions of dollars in funding plus mammoth administration and infrastructure costs.
Thirdly, approximately 34% (and growing) of the population rent. An under-supply of rental property would not only push rents up (giving rise to inflationary pressure and unhappy electorates); it would also put further pressure on the government housing supply.
To encourage the private sector to invest in property for rental, governments have made available extremely viable tax incentives for the investor.
It is through these available tax incentives that investors are able to purchase property at very little cost to themselves and in many cases at virtually no cost to themselves.
Simply put: the taxman and the rental income pay for your investment property!! |
