Tax Benefits

Negative gearing can offer tax benefits. With negative gearing, your borrowing costs exceed your investment income. The law allows you to deduct your borrowing costs from your total income provided that your investments are genuine


However, you only get a tax benefit if you earn other taxable income in the first place.


For example, let’s suppose Bruce buys an investment (it could be shares, managed funds, a rental property, etc) for $100,000 and pays $6,000 in interest and receives $3,000 income from the investments. He has a loss before tax of $3,000.


Suppose Bruce has a well-paid job (more than $150,000 per year) and pays tax on his salary at the top rate of 47.5%. He can now deduct this loss from his taxable income, and reduce his tax bill by $1425 (47.5% of $3000). The tax saving reduces Bruce’s cost of borrowing.


If Bruce earned nothing else apart from his investment, he’s just left with a $3,000 loss.

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