Do Not Make Mistakes on Negative Gearing: Learn the Secrets

Negative gearing was introduced by the Australian government with the original purpose of boosting the housing supply by encouraging greater investment into the new housing sector. However, since its inception, it has been an unmitigated disaster in which the measure is used extensively by smart and capable tax professionals to minimize their client’s tax positions and to help them to save thousands of tax dollars.

In the figure above, we can see that ever since the inception of the negative gearing policy, investor loan approval for new construction has dwindled while the approval for established housing is on the increase.

The recent argument by the Labour Party in wanting to abolish the negative gearing on existing property is based on the rationale that negative gearing introduces speculative bubbles into the market, leading to an inflation of house prices – making them unaffordable to the common Australian. Hence, the scheme from the Labour Party-controlled government is intended to increase the new housing supply and to push the existing house price down, not by a huge amount, but most probably by 10%.

According to the ATO, Australia had 1.9 million property investors in the 2011-12 financial year. Most of those investors failed to cover their costs, suffering a collective $6.8 billion net rental loss. Losses of this magnitude have become exceedingly common in Australia over the past decades. However, most investors are not worried that their investments do not generate positive returns. It seems that generating a positive return is actually a bad thing for them, as it will add to their disposal income, and increase the tax bracket.

The essence of negative gearing is that the negative result from the investment loss will be used to reduce your taxable income, leading to lower new tax rates. Low tax payments mean you will be able to get a tax refund. That is the main driver behind the many property seminars, in which non-tax professionals advocate that it is good to invest in property assets, as you sometimes may just need $2 on a daily basis to cover the repayment of a particular property.

However, such statements depend on many variables and assumptions. This means that, if one of those variables fails to stand, then the investor would be worse off rather than better off. In such a scenario, you will need much more than $2 to cover the repayment of the loan for the property. If you are buying an investment property and you wanted to avoid all the aforementioned hassles, I urge you to talk to your tax agent.

Most people, when preparing tax returns for their investment properties, make the following mistakes:

  1. They do not include a quantitative surveyor report, which should contain a large chunk of the depreciation expense of the property. The depreciation expense can increase the investment loss, leading to an overall lower tax expense.

  2. They do not keep the invoices of all expenses spent, especially travel expenses, bank fees, and borrowing expenses.

  3. They incorrectly take into account the capital expense as a deductible expense. For example, some investors might put stamp duty or conveyance fees as deductible expenses. These costs should be categorized as capital costs and should be used to reduce the capital proceeds at the time of disposal.

  4. They do not keep the invoices for the renovation cost, hence leading to lower investment loss, and the tax has not been fully optimized. Additionally, there may be a high capital gains tax if the property is for future disposal, as the cost base will be under record.

It is important that, before the government finalizes the policies of negative gearing, you pick up your phone and make a call to EndureGo Tax at 0410-829-900. We will be happy to spend time explaining to you the potential changes that negative gearing has on you.