As defined by the Australian Taxation Office (ATO) a rental property is negatively geared if it is purchased with the assistance of borrowed funds and the net rental income, after the deduction of other expenses, is less than the interest on the borrowings.
In this case, a net rental loss arises. You maybe able to claim a deduction of the loss towards other income such as salary, wages or business income through your tax return for the relevant income year. Where the other income is not sufficient to fully absorb all the losses it is then carried forward for the next tax year.
So how does this arrangement become an attractive tax-reducing scheme? Let’s say for someone who is earning a salary of $80,000 (for 2012 FY) whose paid PAYG instalments of $17,550 and a net rental loss of $25,000. For the purposes of this example we ignore everything else eg. Medicare Levy and tax offsets. The loss of $25,000 is then deducted to the gross amount of $80,000, which will bring down the taxable income down to $55,000 and will be taxed accordingly. If the tax on $55,000 is at $11,310 the difference from what have been paid will result in a refund of $6,240 in tax.
Imagine what you can do with the extra money you’d receive from this arrangement. This tax refund doesn’t have to be received by the end of the year. It can also be adjusted through the PAYG system where you only have to pay tax on a lower amount based on the expected rental loss. It would mean less tax to pay and more money on your pocket throughout the year, rather than at the end of the financial year.
The example given is general in nature and doesn’t take into account other considerations such as personal situation and the type of investment property you choose. There are risks involved in this type of investment strategy. One of the major risks associated is with regards to personal cash flow. Obviously, on top of your personal expenses there are also the expenses you have to meet for your investment property such as rates and maintenance.
Investing in a negatively geared property requires proper planning and further caution is required. Tax benefits shouldn’t be the only reason into acquiring such assets.
The main reason to invest into property is the anticipation and expectation of a capital value increase. When a property is sold, the ATO will expect tax to be paid on the Capital Gain. See our report on Capital Gains to understand how tax is calculated.
Here at Advance Business Centres, we can help give advise based from analysing your personal situation, into getting you the right property and setting up the most tax effective way in handling this type of investment. Essentially, from the ground up, we will be there with you all the way. Even if you have an existing investment and needs someone to make it work for you, we can do that too!
Please don’t hesitate to contact us either by email or phone for an appointment. This could be a start in owning your own investment property. So ACT NOW!