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Negative gearing is a heavily debated topic throughout the property industry and is often in the headlines at election time. As one of the major drawcards to investing in property, investors must factor it into their ongoing strategy.

Before exploring the negative gearing and depreciation relationship, let’s cover the essentials first.

What is negative gearing?
An investment property is negatively geared when the return, or rental income, is less than the property’s expenses. This essentially means that the investment property is making a loss.

Just like any other property expense such as interest repayments and insurance, the loss from a negatively geared property is deducted from the investor’s income.

What is depreciation?

Property depreciation is the natural wear and tear of a building’s structure and assets. Property investors can claim this as a tax deduction each financial year. A bonus of depreciation is that it’s a non-cash deduction, so investors don’t need to spend any money to claim it.

Depreciation can be claimed under two categories. The first being capital works deductions on the structural component such as walls, windows and sinks. The second category is plant and equipment deductions on the easily removable assets like carpet, ceiling fans and hot water systems.

The two broad categories mean that investors can claim depreciation on almost anything.

Benefits of negatively geared property

Many investors hold on to their negatively geared investment properties. Some even enter the market with the aim of having a negatively geared property.

But we know negative gearing means they are making a loss, so why would they want to do this?

The answer can be complex and there are many factors to be considered as everyone’s financial situation is different. However, there are two key benefits of negative gearing.

The first is long-term capital gain. Many investors hold onto their properties as part of a long-term wealth creation strategy. Their aim is to sell it in later years at a profit as the property market fluctuates, or to use the property to fund their retirement.

The second benefit is the reduction to taxable income. Property is a tangible asset and if it’s making a loss, it reduces the investor’s taxable income and they pay less tax. This can prove to be beneficial in the short-term and early stages of growing a portfolio.

Depreciation and negative gearing

Given that depreciation is a non-cash deduction, it can turn a positively geared property into a negatively geared one, without making a further cash loss. Let’s see how this works.

In practice: Depreciation and negative gearing

Kim earns $80,000 a year and pays approximately $17,500 in tax.

Kim receives $25,000 in rental income. Her property’s tax deductible expenses include interest repayments, maintenance costs, insurance, council rates and property management fees that come to $22,000 for the financial year. Her property is positively geared with a $3,000 return.

By including depreciation, Kim can claim capital works and plant and equipment deductions totalling $6,000 for the financial year. This changes the previously positively geared property to be negatively geared, with a $3,000 loss.

Kim’s tax liability decreases to approximately $16,500 rather than increasing to approximately $18,500 when positively geared.

To learn more about depreciation, contact BMT on 1300 728 726 or Request a Quote.

 


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This tax advice blog will show you how to be your tax accountant’s best client and why this will always work in your favour.

Does your tax accountant love you or do you suspect they are reluctant to answer the phone when you call?

If you’re leaning towards the latter, you could be missing out on money and opportunities.

Take a look at this tax advice on how to make life easier for your accountant and why this will pay off for you.

Learn the lingo

In Australia, anybody can start a business, even if they have very little financial literacy.

While this tax advice blog isn’t telling you to rush out and get an accounting degree, it really doesn’t hurt to familiarise yourself with the ‘language’ of accounting and some of the terms you accountant uses.

This includes:

  • – Profit & Loss
  • – Balance Sheet
  • – Cash Flow
  • – Arrears
  • – BAS
  • – Equity
  • – Accounts receivable/accounts payable

When you understand what the common terms mean, your tax accountant will be able to explain what’s going on ‘under the hood’ of your business and you will find it easier to have clarity about where you stand financially.

From there, you can start working together to figure out ways to maximise revenue, minimise your tax bill and increase your profit margins.

Keep beautiful books

Nothing makes a tax accountant happier than an organised, fully reconciled cloud-based accounting system which has an itemised record of every dollar that has entered and left your business and what the purpose of it was.

If this is done, all your tax accountant needs to do is cross-reference with your bank statements and ask a few follow-up questions about anything that has fallen through the cracks. You won’t both need to spend hours figuring out where money has gone or come from.

Too busy to keep beautiful books? A bookkeeper can do this for you full-time or for a few hours per month. You can even outsource to someone offshore who will reconcile your accounts daily (just make sure you work with a reputable organisation and sign a contract to protect you from things going wrong).

If you want to do your own books, you will make it easier on yourself by learning to use a cloud-based accounting system. Most are reasonably priced and very user-friendly.

Read more: Tax time countdown: are you ready??

Separate your accounts

Another thing your accountant will thank you for is keeping your business and personal bank accounts separate.

Trawling through one account to do an annual tax return can be a nightmare. It’s stressful for you because you have to account for every single expense for the last 365 days. Some may not be marked in a way that makes it easy to remember whether they were for work or for yourself.

The best thing you can do is have separate accounts and a card for each. If you don’t want to add a credit card, attach a VISA debit or something similar to your business account. This will let you make credit-style payments without going into debt.

Tax accountants see business-only accounts and feel very happy! It makes them look forward to working with you and more likely to make your jobs a priority.

Be a friendly, helpful client

Everybody prefers to work with people they like. If you are responsive, organised and have a decent understanding of the ins and outs of taxes and accounting (tip: read a few tax advice blogs), you will start to become one of your accountant’s preferred clients.

What’s more, people like to do nice things for the people they like. Treat your accountant well and they will be motivated to give you tips, show you clever ways to minimise your tax bill, and offer advice to help you improve your business.

Even if your accounts are in a mess right now, if you can demonstrate that you’re willing to learn and improve, and you have a smile on your face, your accountant is more likely to go the extra mile for you.

Mobbs & Company are tax accountants with offices on the Sunshine Coast, in Brisbane and Caboolture. Contact us for a free initial appointment.