Onsite Sales
R&H
You are viewing an article that is not currently active

The positives of negative gearing

March 16, 2021

Treasurer Josh Frydenberg’s next Federal Budget is due for release in early May 2021. Thankfully, with a change of Opposition Leader after the last Federal Election, changes to property taxation aren’t on the table, and Australians can continue to enjoy the positive benefits of ‘negative gearing’ confidently.  

Borrowing to invest in Australia’s favourite asset class

Introduced in the 1980s by then Treasurer Paul Keating, negative gearing (also called borrowing to invest) is an initiative to encourage income earners to become landlords and, as such, this sound investment strategy also supports the supply of rental properties in Australia. 

Ultimately negative gearing lets you build your stake in an asset (over and above what you could afford with your savings), and this has the potential to produce solid returns. Long term, residential investment property generated average annual returns of 8.8% in the decade to 2017. Over the same period, shares produced 4.5%[i] according to the latest ASX/Russell Investments report.

But on the flip side, negative gearing can also magnify losses – although unlike investors buying shares with borrowed funds, there are no margin calls to repay the debts if markets head south.

That said, you must do your homework before borrowing money to buy an investment property. This legwork involves finding a quality, well-located property that can produce positive long-term returns with the assistance of an experienced agent from Raine & Horne. In other words, make the right investment decision first and then consider the tax benefits. 

Tax advantages with negative gearing

With over 2 million Australians now owning one or more investment properties, it’s fair to say the initiative has worked a treat. Indeed, the Howard Government’s decision to halve the rate at which capital gains are taxed when an investment property is sold enhanced negative gearing’s appeal. This legislative leg-up meant investors who have a marginal rate of 45% now pay tax at 22.5% on the profits from the sale. 

When the costs of owning an investment such as municipal and water rates, strata levies, land tax, insurances, repairs, depreciation, maintenance, property and strata management fees exceed the rental income, the property is negatively geared. In other words, your investment must make a loss before you can claim the benefits of negative gearing. 

Apart from ‘revenue deductions’ such as those mentioned above, property investors can claim capital items such as hot water services and carpets, curtains and timber flooring. Any white goods can also be ‘depreciated’. In other words, landlords can claim the cost of ‘capital items’ over several years rather than as a once-off deduction. The ATO provides schedules outlining the depreciation cycle and these range from a few years to 20 years or longer. The effective life for carpets in a residential property, according to the ATO, is ten years.

Before buying a negatively geared investment property, be sure to talk to your accountant about whether this is the right investment strategy for you.

[i] https://www.asx.com.au/documents/research/russell-asx-long-term-investing-report-2018.pdf