1. The Mysteries of Negative Gearing Negative gearing is a legitimate tax planning strategy but it is not for everyone. Derek Miles www.financialmilestones.com.au
2. What can you negative gear ? Property – the most common and well known Shares or managed funds (margin loans) Business assets Managed Investment Schemes – agriculture or forestry
3. What is Negative Gearing ? It is the offsetting of the difference between investment income and the expenses incurred in holding these investments, against other ordinary income such as PAYG income and thereby benefiting from a tax refund of PAYG tax already paid.
4. An example of negative gearing Tax Payable (incl Medicare L) Taxable income 85,000 $21,875 Gross rental income 18,200 Less expenses:- Interest on loan (8%pa) 28,000 Rates 2,400 Agents fees 1,500 Maintenance 3,000 Borrowing Costs 800 Building Allowance 6,250 Depreciation 5,600 Other 1,000 Total Expenses 48,550 Rental Loss 30,350 New Taxable Income 54,650$11,815
5. What is the cash flow consequence ? Inflows:- Gross rental income 18,200 Refund 10,060 28,260 Outflows:- Interest on loan (8%pa) 28,000 Rates 2,400 Agents fees 1,500 Maintenance 3,000 Other 1,000 35,900 Negative Cash Flow $7,640 Non Cash Items (but tax deductible) Borrowing Costs 800 Building Allowance 6,250 Depreciation 5,600
6. Misconceptions 1 You must have paid PAYG for the cash flow to work (for business clients it is a reduction of tax payable so they still need to have the cash flow to support the negatively geared investment). You cannot purchase investment after investment – you must have the cash flow from other income to support the negative gearing and there is a limit. You purchase an investment that requires a larger loan than you can afford. What if the investments stop earning – can you support the debt? Negative gearing is not as attractive for lower incomes. It works best with the highest tax bracket.
7. Misconceptions 2 Negative gearing is prone to hiding poor investment assets (mistrust investments sold with negative gearing as the dominant motive). The investment assets must have a reasonable basis of return. You cannot negatively gear effectively in a trust or company (losses cannot be transferred against personal incomes. Changing your home to a negative gearing asset is ineffective – you cannot transfer debt (further explanation).
8. Who’s advice should you seek ? Your Accountant – Tax Advice – Cash flow analysis. Your Financial Planner – investment advice/affordability Your Mortgage Broker – most effective borrowings Quantity Surveyor – cost analysis of the depreciable items that are deductible
20. Structured business coaching including development of business plans and business strategy developmentPhone :- 07 3396 7757 Mobile:- 0411 865 695 Email:- derek@financialmilestones.com.au Web:- www.financialmilestones.com.au Address:- 2/71 Edith Street, Wynnum