No pain, no gain: a note on negative gearing and other tax facts for property owners

A proposal to change the tax breaks associated with negative gearing landed our PM in the bad books earlier this year, and investment property owners braced themselves for the fall-out.

Everyone can breathe easy, though. Turns out it was just talking and nothing will change any time soon. Now that the dust has settled, allow me to provide a quick refresher on how negative gearing and capital gains work and how they may affect your tax bill.

A simple definition of negative gearing

Negative gearing occurs when the costs associated with owning a rental property (repairs, rates, mortgage repayments) outweigh the income it generates each year. This creates a ‘taxable loss’, which can usually be offset against your other income – including your wages or salary = tax savings.

The plot thickens, though, because the fly in the ointment is capital gains tax. Capital gains kicks in when you sell your property. If the property you purchase won’t eventually lead to a capital gain, then the concept of negative gearing is null and void.

BUT HOLD THE PHONE, HERE’S WHERE IT GETS INTERESTING… The rental property loss won’t necessarily eat into your take-home pay too much. Did you know you can make a PAYG variation throughout the year and not have to wait until you lodge your return for your refund?

AND you may even be entitled to a 50% discount on the gain! Property assets held for over 12 months by individuals, partners in a partnership and trusts get a 50% discount on their Capital Gains bill.

It all depends, my friends, on your individual circumstances and how you choose to calculate it – the ATO lets you do it your way and provides a handy table for figuring things out.

Calculation methods

MethodDescriptionHow to do it
CGT discount method: For assets held for 12 months or more before the relevant CGT event.*Allows you to reduce your capital gain by 50% for individuals (including partners in partnerships) and trusts and 33 1/3% for complying super funds. Not available to companies.There are more rules for beneficiaries who are entitled to a share of a trust capital gain.Subtract the cost base from the capital proceeds, deduct any capital losses, then reduce by the relevant discount percentage (see the examples in Using the capital gain or loss worksheet).
Indexation method: For assets acquired before 11:45am (by legal time in the ACT) on 21 September 1999 (and held for 12 months or more before the relevant CGT event).Allows you to increase the cost base by applying an indexation factor based on the consumer price index (CPI) up to September 1999.Apply the relevant indexation factor, then subtract the indexed cost base from the capital proceeds (see the examples in Using the capital gain or loss worksheet).
Other method: For assets held for less than 12 months before the relevant CGT event.*Basic method of subtracting the cost base from the capital proceeds.Subtract the cost base (or the amount specified by the relevant CGT event) from the capital proceeds (The ‘other’ method of calculating your capital gain).

This half-price advantage is what the government is currently examining, but so far so good. This significant tax saving stays. For now. The second that changes, you’ll hear it here first.
Clear as mud? I know it’s a tough concept to wrap your head around. If you think you may be affected, call 1300 528 717 and I’ll talk you through it.
Or better yet, come see me and I have THE best way of explaining it using hand gestures, stick figures and stationery items. Clients love it and cries of ‘Now I get it!’ can be heard up and down the street.

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