To keep improving housing affordability, the Australian government has continued to run Negative Gearing. The aim is to give owners an incentive to keep rents relatively affordable. This article looks in detail at what negative gearing is, its effect on landlords, how landlords benefit from it, and what it means for foreign owners.
What Is Negative Gearing
Negative gearing is a common term used to describe a situation where the expenses associated with an asset (including interest expenses) exceed the income earned from that asset. Negative gearing applies to any type of investment, not just residential property, but to assets generally. It lets an owner deduct their loss against other income, such as wages and other earnings. Negative gearing directly affects an Australian’s personal income tax. The most direct example is a residential property whose rental income doesn’t cover the costs of holding it (water bills, mortgage interest, management fees, and so on).
Why Accept a Loss Just to Get Negative Gearing?
Australia’s personal income tax system works on the same principle as company tax: the government taxes an individual’s net income — that is, total income minus any expenses incurred in earning that income. This is similar to how a company’s profit (income minus expenses) is taxed, i.e. tax is charged on a company’s net profit rather than its gross revenue. So negative gearing directly affects personal income tax: an Australian owner can deduct the loss from their salary income when calculating personal income tax, thereby reducing the tax they pay. In 2012-13, for example, over 1.9 million people reported rental income, and about 1.3 million of them reported a net rental loss (negative gearing), letting their salary income be taxed at a lower effective rate.
The Effect of Negative Gearing on Foreign Owners
Foreign owners can also benefit from negative gearing, because the capital gain made on selling a property counts as personal income and must be combined with that financial year’s other personal income (rent) when calculating tax. For more detail on how this is calculated, see: Capital Gains Tax on Selling Property in Australia. Holding a property for more than 12 months also qualifies for a 50% income tax discount when the gain is calculated. Negative gearing can be deducted directly at tax time, thereby reducing the tax payable when the property is sold.
Take the following example: purchase price AUD 300,000, sale price AUD 400,000, held for more than 12 months, monthly rental income of AUD 1,000, and monthly holding costs (water, council rates, management fees, mortgage interest, depreciation) of AUD 3,000.
The negative gearing generated = AUD 24,000
The year’s taxable personal income is then: CGT ($400,000 − $300,000) ÷ 2 + (−$24,000) = $26,000
The actual personal income tax for that year is (2025-26 rates): ($26,000 − $18,200) × 16% = $1,248
By contrast, if there were no negative gearing — say the rent were instead AUD 4,000 a month — the taxable income would be:
CGT ($400,000 − $300,000) ÷ 2 + $4,000 × 12 = $98,000
The actual personal income tax for that year would then be (2025-26 rates): ($98,000 − $45,000) × 30% + $4,288 = $20,188
The owner’s actual net gain would then be only $100,000 − ($3,000 × 12) − $20,188 = $43,812
In Summary
As a result, owners will sometimes be willing to rent a property out at a lower rent in certain circumstances, since it increases their own actual net return. This helps the Australian government’s goal of keeping the overall rental market more affordable. What arrangement will actually maximize an owner’s final net return is best worked out with the advice of a suitably qualified professional, such as a locally licensed accountant.
Have a question about this guide? Leave a comment below, or ask Zagdim directly.
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