Negative Gearing Perth – what does it really mean?
Negative gearing is an often used and sometimes misunderstood phrase in relation to investment and borrowings. When boiled down to its basics, negative gearing refers to the practice of accepting a short-term loss from an investment with a view to converting that loss ultimately to a capital gain.
An investment is said to be negatively geared if, after taking into consideration the interest cost of the investment, the investment shows a negative return.
Whilst all taxpayers can negatively gear a property or other investment, it is typically more appealing to taxpayers with higher marginal rates of income tax. This is because the Australian Taxation Office allows an offset of the loss from the holding of a negatively geared investment against other income. Therefore, the higher a taxpayer’s marginal tax rate, the greater the benefit from a gearing strategy.
There may come a point when the owner of an investment decides to cash in on the capital growth their investment may have experienced over time.
It is at this point, when determining the tax to pay on the capital gain, that investors may appreciate the gearing versus capital gain outcomes.
Investors receive a tax deduction against other income on a dollar for dollar basis during the period that they hold their investment. So a taxpayer on the top marginal rate of tax of 46.5% incurring a net loss on their investment is effectively having it subsidised at the rate of 46.5 cents for every dollar of loss incurred whilst they remain at the top marginal rate.
Conversely, due to the 50% discount that applies to capital gains for investors who hold investments in excess of 12 months, the tax payable on a capital gain made by a top marginal rate taxpayer in real terms equates to 23.25% maximum.
The secret to the gearing strategy lies in the ability of the investment to produce a capital gain over time where the investor can cash in on the gearing advantages whilst minimising tax payable on the gain.
PAYG Withholding Tax Variation
Taxpayers with negatively geared property or other investments may make application to vary the tax instalments deducted from salary or wages to enhance cash flow during the year rather than await a substantial tax refund on lodgement of their taxation return after financial year end.
The application needs to be lodged during May/June to allow for processing and approval, then notification to the relevant paymaster prior to commencement of the new financial year.
For assistance or advice please Contact Us to lodge on line and so bring forward the benefit of the reduced tax payable.