tyle="margin-left:17.85pt">·         A general principle of tax in Australia is that costs necessarily incurred in earning income are tax deductible.

·         The tax law allows taxpayers to deduct certain costs from income when those costs are incurred when borrowing money for investment provided the investment has been made to produce assessable income.

• The term ‘negative gearing’ is often used in relation to investment or rental properties.
• The general principle is that costs incurred in relation to earning income are tax deductible to an investment property. Where a loan is entered into to buy an income-producing property the interest on the loan is tax deductible.
• A rental property is negatively geared when the income earned (rent) is lower than the cost of the borrowings and related expenses of the property.
• A property is regarded as negatively geared until the costs of the loan no longer exceed the rental income. At this point the investment will generate positive returns.
• The result of negative gearing is a rental loss that can be used to reduce tax payable on other income such as your salary.
• If other income is not sufficient to offset the total rental loss in one period the rental loss can be carried forward to be offset against income in future years.
• There are some general rules about negative gearing a rental property that you should be aware of before making an investment decision.
• Non-deductible capital costs occur when the purchase costs of the property become the cost base of the property. The property is an asset for Capital Gains Tax (CGT) purposes. When the property is ultimately sold there will be CGT consequences. It is important to identify and record all the capital costs of purchase separately to the costs of running and maintaining the property. Typical capital costs include:
  • legal fees;
  • stamp duty;
  • preliminary repairs; and
  • borrowing costs such as fees.
• Ordinary recurring expenses such as strata fees, repairs and utilities costs are not capital costs. These are the costs of maintaining the property and are allowable deductions in addition to the cost of interest on the loan.
• The fixtures and fittings in a rental property are treated as depreciable assets for which depreciation deductions can be claimed.
• When the investment property is ultimately sold if it has been held for more than 12 months it should be eligible for the 50% CGT discount.
• The requirement to produce and maintain detailed records for tax purposes for an investment property will increase the time or costs associated with an annual income tax return.
• Ensuring that proper depreciation schedules and all expenses incurred during the year are maintained will greatly assist you in the accurate preparation of tax returns.

·         For negative gearing to be an appropriate strategy there must be other income from which to claim the loss of the allowable deductions.

• Property is a long-term investment and the purchase needs to be motivated by investment needs.
• Seeking tax advice from a tax professional may assist you in determining the most suitable ownership structure. For example you will need to consider whether sole or joint ownership is appropriate and whether negative gearing is suitable for you.
• The ATO has a publication that outlines the approach to rental properties. It is updated each year and can be found at https://www.ato.gov.au/Individuals/Tax-return/2014/In-detail/Publications/Rental-properties-2013-14/?page=16.
• Recent commentary in the media in November 2014 has suggested that negative gearing along with CGT concessions should be the subject of review and potentially tax reform.
• It is not known whether the government will act on these recommendations. This is a controversial area of tax reform. It is likely to be slow to change due to the impact on taxpayers with investment properties and the nature of the Australian real estate market.