Negative vs Positive Gearing
Negative and positive gearing are terms associated with investments in property in Australia and help in saving taxes under the provisions of the law. Though there are clear cut differences in the two concepts, people find them confusing. This article will try to simplify the two terms so as to enable property owners to save on taxes.
When the total expenses on maintaining a property purchased with the help of borrowed funds exceed the total income accruing from the property, the property is said to be negatively geared. As there are losses incurred on such a property, these losses need to be offset against other incomes such as income from salary or business income. This has the effect of making net income go down and helps a person to get reduction in tax payable or to receive larger tax refunds when filing income tax returns.
This is a concept totally opposite to negative gearing. Here the total income from maintenance of a property that has been purchased by taking a loan on interest is greater than the total expenses incurred on maintaining the property. This has the effect of adding to the net income of the person and makes him pay more taxes on income.
It is a fact that the concept of negative gearing is more popular among property owners. This is because it makes them pay lesser taxes at present, effectively enhancing returns on investment. If one looks at how properties have fared for the owners, it becomes clear that an overwhelming majority of property owners are taking help of negative gearing as they are reporting losses from their borrowed properties.
Negative Gearing and Positive Gearing
• Negative gearing is good for those in the highest bracket of income levels. Loss on purchased property means it can be offset with other incomes and they need to pay lower taxes. This approach assumes that the losses so shown on the property will be offset when there is an increase in the value of the property.
• However, there is no harm in positive gearing (rentals are greater than outgoings) as positive cash flow can be used to invest in more properties.