How does negative gearing work?
We love these types of questions. As far as we’re concerned, there’s no such thing as a silly
question. Here’s a few questions I hear regularly that you may have wondered the answer to:
- How does superannuation work?
- How much money do I need to retire?
- Should I buy an investment property?
- Should I put money into my super fund?
- When can I access my superannuation?
- Do I need insurance?
- What is income protection cover?
I do also get some very obscure questions, which I won’t be mentioning specifically – as a
Financial Adviser I respect all questions that are asked of me and firmly believe that there are no
silly questions. And to answer the original question of how does negative gearing work? It’s
essentially an investment using borrowed money that costs more to own than the income that
comes from it. So essentially money is borrowed for the investment, and then more money goes
out than comes in. Or put another way, it’s an investment that costs money to own. In the media
negative gearing is most commonly referred to in the context of property investing, but negative
gearing doesn’t just involve property investments, it could be share or managed fund
Another important thing to note about negative gearing is that because money is borrowed, the
level of risk associated with the investment is higher. You may ask why anyone would want a
negatively geared investment if it’s risky AND you lose money? Currently, the loss incurred may
be claimed as a tax deduction against other income. So if you have a high salary and a high
marginal tax rate then you may save some tax if you have a negatively geared investment. But
it’s important to note that even though you claim a deduction and get some tax back, you don’t
get back 100% of what you lost. You still lose money.
So why would you do it? People generally do it with the intention of the investment going up in
value over the long term. So when the increase in value is taken into consideration, overall, the
investment might be worthwhile, or better. However it’s important to note that this strategy
involves risk. The investment doesn’t always go up, and because negative gearing involves a
loan, things can potentially go bad very quickly if the investment value goes down. And even if
the investment value does go up, it still needs to go up enough that the profit after capital gains
tax still makes it worthwhile – something that many people do not consider.
So now you know how it works, why someone might do it, and also that it can be quite a risky
strategy. So if you were thinking of negatively gearing I strongly suggest that you speak with a
licenced Financial Adviser first. They can help to work out whether it’s a worthwhile strategy
based on your financial goals, or whether there may be other options available for you that might
be more suited to your financial situation, or involve less risk.
Property is just one area of investment, there may be other investment advice areas to consider.
They can also explain the importance of appropriate insurance with regards to a negative gearing
strategy, and consider other relevant areas of financial planning advice that might be relevant.
You might have other financial services or planning services needs, and you may also need to
speak with a lawyer about estate planning.
One particularly important thing to note with regards to negative gearing and investments is that
an investment strategy generally should not be chosen based on expected tax outcomes. Ideally
an investment strategy will be chosen on its merits, and because it’s a good strategy for you,
your financial future and your individual personal and financial circumstances.
If you're thinking about an investment property, investment strategy or negative gearing
investment strategy, you're welcome to get in touch and I can explain the advice process and
how it works. Whilst I'm a financial planner in Canberra I can provide advice Australia-wide. But
whether it's me or someone else, please consider receiving advice from a licenced Financial
Adviser before embarking on a potentially risky investment strategy.
Alison Kaigan - Your Canberra financial planner