Gearing: Negative, Neutral & Positive

At this point in our readers following our blogs, it is safe to say after many discussions, Tax law in Australia is inherently complex.

As an ever-evolving beast, a change in one area of tax law has implications across many other areas, especially when it comes to people's finances and investing.

Negative gearing is one of these areas, and it's been a hot topic in recent years. Deciding whether your property will be negatively, neutrally or positively geared is a critical consideration when you're structuring your investments. Below, we take a look at each and what you should consider.

What does Negative or Positive Gearing entail?

The gearing of an investment property refers to the borrowing and interest deductions associated with the investment. The way you structure your investment will impact your bottom line, so you need to understand each scenario and talk to an accountant to help you decide what's right for your unique situation.

Negative Gearing

When the deductions claimed on a property are more than the annual rental income, the property is negatively geared. It means there is a tax loss for the property at the end of the financial year.

Neutral Gearing

Neutral gearing means the income and expenses on a property are balanced. It will not affect your taxable income.

Positive Gearing

When the rental income from a property is more than the deductions claimed, the property is positively geared and adds taxable income to the taxpayer.

Which applies to your investment goal?

In short, ascertain your goals and speak to a financial professional.

Overall, it heavily depends on your situation. Some investors prefer negative gearing due to the tax loss that can be offset against their taxable income. On the downside, it means the property's rental income isn't enough to cover what could be considerable monthly expenses. While it may feel like a bonus at tax time, it can be a drain on your cash flow throughout the year.

Whilst some investors favour positive gearing as it provides cash flow to the investor, however, there will be income tax implications at tax time. You'll need to work with your accountant to forecast your current and future taxable income (PAYG, investment properties and other income) to determine what effect positive gearing will have on your marginal tax rate.

The choice to implement negative, neutral or positive gearing will depend on your unique financial situation and goals. Make sure you speak to your accountant for tailored advice to make an informed decision.

Remember, this article does not constitute financial or legal advice. Please consult your professional financial and legal advisors before making any decisions for yourself.

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