Negative gearing explained.

Negative gearing is a hot topic in Australia right now, with many differing opinions on how it should be handled. Often in the spotlight during election periods, this investment strategy has been a point of contention due to its implications for housing affordability and the broader economy. Let's break down what it means, how it impacts property investors, and why it's such an important topic in today’s market.

What is negative gearing?

Negative gearing happens when the costs of owning an investment property (like loan interest, property management fees, insurance, and maintenance) exceed the income it generates. For instance, if your rental income is $2,800 per month but your total expenses are $3,200, you’re negatively geared.

This strategy allows investors to deduct the losses from their taxable income, such as salary and wages, which can lower the amount of tax they pay. While this might seem like a loss in the short term, many investors are drawn to it because of the potential for capital gains.

Why is negative gearing attractive to investors?

The appeal of negative gearing lies in the hope that the property’s value will rise over time, eventually offsetting the initial losses. The ability to reduce taxable income, especially for high-income earners, adds to its attractiveness. For many, it's about long-term capital growth rather than short-term rental returns.

What is Capital Gains Tax (CGT)?

Capital Gains Tax (CGT) is the tax paid on profits from selling an asset like an investment property. If you’ve owned the property for over 12 months, you can benefit from the capital gains tax discount, which reduces the taxable gain by 50%. This is a significant benefit for those holding onto their investments for the long term.

Why is negative gearing in the news?

Negative gearing, along with the CGT discount, is under intense scrutiny. Many are calling for reforms to these policies, arguing that they contribute to housing affordability and equity issues. For example, the Henry Tax Review in 2010 proposed a 40% reduction in the capital gains tax discount, but it was never adopted. More recently, organisations like the Australian Council of Social Service (ACOSS) have been advocating for changes.

Political stances on negative gearing

• Greens: Party leader Adam Bandt has made it clear that changes to negative gearing will be on the table if they hold the balance of power.
• Labour: Although they previously proposed overhauling negative gearing during the 2016 and 2018 elections, it is not currently part of their agenda. Instead, Labour is focusing on addressing housing supply issues.
• Coalition: Opposition leader Peter Dutton has promised that if elected, there will be no changes to negative gearing and capital gains tax concessions.

Ready to buy an investment property?

Given the shifting landscape of negative gearing and its potential impact on your investment strategy, it’s essential to consult with a trusted mortgage adviser before making any decisions. Our experts can help you understand how these changes may affect your finances and assist with finding the best loan options for your investment goals.

Contact us today to explore your investment loan choices and ensure you're making the right financial decisions in this dynamic market.