Negative gearing and capital gains tax have become hot topics again, with recent discussions about potential policy changes reigniting debate. While the Albanese government has denied plans to alter these tax concessions, the uncertainty highlights the importance of understanding how negative gearing works and who benefits from it. As a recognised negative gearing expert, Jovan Cvetkoski provides insights into how these tax strategies impact investors.
What is negative gearing?
Negative gearing occurs when an investor borrows money to purchase an asset (such as property) and the expenses, including interest on the loan, exceed the income generated from that asset. In simple terms:
- Negative gearing: The property operates at a loss (expenses > rental income).
- Neutral gearing: The rental income covers the expenses exactly.
- Positive gearing: The property generates more income than its expenses, leading to a profit.
Many investors accept short-term losses from negative gearing in the hope that capital growth in property values will ultimately outweigh these losses. However, working with a negative gearing expert ensures that these strategies are executed effectively.
What about capital gains tax?
Capital gains tax (CGT) applies to profits made from selling an investment property. Currently, Australian property investors receive a 50% discount on CGT if they hold the property for more than 12 months. However, previous policy discussions have proposed reducing this discount to 25%, which would increase the tax burden on investors.
Why would investors choose negative gearing?
Despite making a loss in the short term, investors rely on long-term capital growth to make negative gearing worthwhile. The idea is that while they may lose money on rental income, property values will appreciate over time, leading to significant capital gains when they sell.
Additionally, negative gearing offers a tax advantage because losses can be offset against other taxable income. However, the extent of this benefit depends on an investor’s marginal tax rate. Jovan Cvetkoski, a leading capital gains tax expert, advises investors on how to maximise these tax benefits while maintaining a strong financial position.
Who benefits the most from negative gearing?
Higher-income earners gain the most from negative gearing because they can claim larger tax deductions. Let’s break it down:
- A taxpayer earning $80,000 per year with a $10,000 rental loss can claim a deduction at their 30% marginal tax rate, resulting in a $3,000 tax benefit.
- A taxpayer earning $200,000 per year can claim the same $10,000 rental loss at their 45% marginal tax rate, resulting in a $4,500 tax benefit.
Although negative gearing is more valuable for high-income earners, it is widely used across all tax brackets. According to ATO data, a significant percentage of middle-income earners also negatively gear their investments.
While higher earners receive a larger tax benefit, many Australians earning between $37,000 and $180,000 also take advantage of negative gearing.
Could negative gearing be abolished?
This remains an open question. In 1985, negative gearing was briefly abolished, only to be reinstated in 1987 after mixed economic effects. Some experts argue that removing negative gearing would increase rental prices, while others suggest it could help first-home buyers by making property investment less attractive.
Additionally, limiting negative gearing to newly built properties has been proposed as a way to incentivise housing development rather than inflating existing property prices.
What does this mean for investors?
For property investors, it is crucial to stay informed about potential policy changes and assess how negative gearing fits within their broader financial strategy. Seeking advice from a cashflow planning or financial planning expert like Jovan Cvetkoski at Knight can help investors navigate these complexities and plan accordingly.
Need expert advice on negative gearing?
At Knight, our experienced financial advisors, including Jovan Cvetkoski, specialise in negative gearing strategies and capital gains tax planning. If you need personalised guidance on your investment portfolio, contact us today to discuss how we can help optimise your financial position.
