Question:
Save Tax: Negative Gearing
Answer:
Recent changes are outlined below:
July 1, 2022
- Loss carry back for eligible companies extended to cover 2023 income year.
- Professional firm profits diverted to the professional's spouse or other associates to be reviewed under new Tax Office guidance.
- Corporate collective investment vehicle legislative regime introduced.
- Temporary full expensing of depreciating assets extended to include 2023 income year.
- Depreciable assets of a company joining a tax consolidation group have tax costs setting rules modified for assets depreciated under temporary full expensing rules.
December 9, 2021
- Reduced Pandemic leave disaster payment of $750 per week made available through to 30 June 2022.
August 5, 2021
- COVID-19 Disaster Payments are non-assessable non-exempt income in 2021 income year and later. Payments phasing out as vaccination rates increase.
July 1, 2021
- New Investment Engagement Service launched for businesses planning significant new investments in Australia.
- Tax Office small business independent review service made permanent for businesses with turnover < $10m, for income tax, GST, exercise, luxury car tax, wine equalisation tax and fuel tax credits. Requested before amended assessment issued.
- Small business income tax offset for individuals increased to provide a reduction of 16% for a tax payable up to $1,000.
- Self-managed superannuation funds can now have six members, increased from four members previously.
July 1, 2021
- Some COVID -19 state and territory business grants received by small and medium enterprises are non-assessable, non-exempt income for 2021 and 2022 income years.
- Certain state, territory and local government financial support for individuals and businesses suffering COVID-19 impacts made exempt where businesses have turnover less than $50 million and only in eligible programs.
March 31, 2021
- JobKeeper payments scheme ended.
October 5, 2020
- Boosting apprenticeship commencements subsidy (up to 50% of apprentice's wages) is assessable income.
June 4, 2020
- Homebuilder grant for new home or substantial renovation construction is not subject to income tax.
April 1, 2020
- COVID-19 cash flow boost payments are not subject to income tax
Negative gearing can be briefly explained as paying more in interest, depreciation and other outgoings than you receive in income from your investment. At first this seems most unwise, but the following example may make the position clearer in the context of our current tax rules. Geared investments (shares, rental property or unit trusts financed by borrowings) provide a tax deduction if the interest and other costs of the investment exceed the income earned. This is called negative gearing.
If you purchased a house for $400,000 as an investment and borrow the entire amount at 5% p.a. interest, your annual interest repayment would total $20,000. You rent the house out for $350 per week, giving you an annual rental income of $18,200.
The cost of rates, home maintenance, insurance, agent’s fees and so on, total $5,000 per year. Depreciation and capital works deductions amount to another $5,000. The total tax deductions for this investment amount to $30,000 ($20,000 in interest, $5,000 in running costs and $5,000 in depreciation), but income is only $18,200.
The shortfall of $11,800 is wholly tax deductible – it is deducted from your gross income in assessing your taxable income. This is a considerable tax saving while you hold the investment. The investment however, hopefully is making capital gains and you should eventually have a 50% CGT discount when the building is sold.
If the house keeps pace with inflation, the running expenses are fully covered by the capital increase, but you have a tax deduction for the expenses. If you have borrowings for investment properties as well as borrowings for your home and car, make sure you pay off your home and car debts as quickly as you can because the interest on these is non tax deductible.
