How Does Negative Gearing Work in Australia?

Negative gearing is one of the most talked-about concepts in Australian property investment, yet it is also one of the most misunderstood. Some people treat it as a tax strategy in its own right. Others dismiss it as an unnecessary loss. The reality sits somewhere in between.

This guide explains how negative gearing works in plain English, what tax benefits it can provide, and the questions you should be asking before you rely on it as part of your investment strategy.

What Is Negative Gearing?

A property is negatively geared when the costs of owning it exceed the rental income it generates. In other words, you are spending more to hold the property than it is earning you each year.

Those costs typically include loan interest, council rates, property management fees, insurance, maintenance, repairs, depreciation on the building and its fittings, and any other expenses directly related to owning and managing the rental property.

In Australia, the Australian Taxation Office (ATO) allows you to deduct these losses against your other taxable income, such as your salary or business income. This is the tax advantage that most people are referring to when they talk about negative gearing.

A Simple Example

Suppose you own an investment property in Perth that earns $24,000 in rent per year. Your annual holding costs, including mortgage interest, rates, insurance, property management and depreciation, total $32,000. You are making a loss of $8,000 per year on the property.

Under negative gearing rules, that $8,000 loss can be deducted from your taxable income. If you are earning $100,000 from your job, your taxable income reduces to $92,000. At a marginal tax rate of 34.5 per cent (including the Medicare levy), that $8,000 deduction saves you approximately $2,760 in tax.

The property is still losing you money in cash terms, but the tax saving partially offsets that loss. The investment thesis is that capital growth in the property’s value over time will more than compensate for the annual shortfall.

What Expenses Can You Claim on an Investment Property?

The ATO allows a wide range of deductions for rental properties. Common claimable expenses include:

• Loan interest (but not the principal repayment component)
• Property management and agent fees
• Council rates, water rates and land tax
• Building and landlord insurance premiums
• Repairs and maintenance directly related to the rental activity
• Depreciation on the building structure and eligible assets such as appliances and fittings
• Accounting fees for preparing your rental schedule
• Travel expenses to inspect the property, where eligible under current ATO rules

It is worth noting that not all expenses are deductible in the year they are incurred. Some costs, such as capital improvements, must be depreciated over time rather than claimed immediately. A qualified accountant can help you distinguish between repairs and improvements, which is one of the more common areas where property investors make mistakes.

Negative Gearing vs Positive Gearing

A positively geared property is one where rental income exceeds holding costs. In this case, the surplus becomes taxable income, but you are generating genuine cash flow from the property each year.

Neither structure is inherently better. Negative gearing suits investors who have a higher taxable income to offset, a long investment horizon, and confidence in the property’s capital growth potential. Positive gearing suits investors who want or need ongoing cash flow, or who are approaching retirement and reducing their income-earning capacity.

Many investors hold a mix of both, and the right balance depends on your broader financial position and goals.

What Negative Gearing Does Not Do

Negative gearing reduces your tax bill, but it does not eliminate your cash outflow. You are still funding the shortfall out of your own pocket each month. If the property does not grow in value, the tax saving alone is unlikely to justify the strategy.

It is also important to understand that the deductibility of rental losses depends on you genuinely trying to generate income from the property. The ATO can deny deductions if it determines that you are not operating the property on a commercial basis.

Key Questions to Ask Before Relying on Negative Gearing

• Can I comfortably fund the monthly cash shortfall if interest rates rise or the property sits vacant?
• Is the property in a location with a credible history of capital growth?
• Have I had a depreciation schedule prepared by a qualified quantity surveyor?
• Am I correctly separating deductible repairs from non-deductible capital improvements?
• Have I considered how this property fits into my overall tax position and retirement plan?

Conclusion

Negative gearing can be a legitimate and effective part of a property investment strategy, but it works best when it is part of a broader financial plan, not a standalone tax hack. The tax benefit is real, but the underlying property still needs to stack up on its own merits.

Getting the tax treatment right on an investment property is not straightforward. From correctly categorising expenses to claiming depreciation and preparing your rental property schedule, there are plenty of opportunities to leave money on the table or inadvertently make errors.

Do you own an investment property in Perth or Western Australia?

Star Rise Accountants specialises in investment property taxation, including rental schedules, depreciation claims and capital gains tax advice. Contact us to make sure you are claiming everything you are entitled to.

Disclaimer: The information in this article is general in nature and does not constitute accounting, taxation or financial advice. Individual circumstances vary and tax rules are subject to change. Please seek advice specific to your situation from a registered tax agent or qualified accountant before making any investment or tax decisions.