We all know there are certain things the parliament likes to talk about, or try to avoid talking about. One of those things that is briefly discussed without actually exposing too much information is Negative Gearing. It seems to always be a hot topic, but why? We’re sure some people associate the word “negative” as well, something negative… because should we state the obvious? It’s not a positive word. However, is it possible this is just an oxymoron? Now we aren’t here to tell you it’s good or bad, we’re here to give you the information to make an educated decision on your own.
First and foremost you’ll most likely hear the term ‘Negative Gearing’ in regards to investors in the property market. Investors using this method typically are higher income earners. The goal? To invest more in the property market whilst reducing annual income tax bill. If that doesn’t make sense, then we’ll give you one sentence to sum up this concept of investing.
Negative Gearing is investing borrowed finances (money) typically in the property market (property investment) in a way that results in an income loss that can then be claimed as a tax deduction.
If you’re still struggling to understand the concept hopefully after reading this example it can clear some confusion.
John Doe is an avid property investor and he’s just purchased a new unit for $500,000, putting in $150,000 of his own money and borrowing the remaining $350,000. The interest on the borrowed money is currently 10% each year yielding $35,000. John Doe receives weekly rent of $600 or $31,200 yearly. This gives John Doe a taxable loss of $3,800, which he can then use as a reduction on his tax payable on his overall salary income.
Investors using this investment strategy will then apply for an ATO PAYG Withholding Variation to reduce the amount of taxes taken out of the their salaries. This method can allow for a big boost in investor’s personal cash flow.
Now that we’ve got the two important aspects of understanding what Negative Gearing is, stick around for our next release about Negative Gearing and the risk associated with it. Remember, every investment carries risk it’s up to you to decide whether or not you can tolerate the level of risks associated! Head over to take a look at our questionnaire, Think You’re A Risk Taker?, to determine your risk tolerance.