By: Anand Shukla

It was a typical weekend and a social gathering at one of my friend’s residence and the much asked question we ask each other in such social gatherings propped up once again. Did you buy a property during the year?  Not to my amusement, questions were asked in relation to the loan product, interest rates, domestic and global economy, property and of course my favourite “tax”. Well, this was understandable because that is what I do for a living but what amused me more was the fact that most knew that tax benefits could be received by investing in negatively geared properties but had no clue about a positively geared property. When I used the term positively geared, some questioned.  And that is what prompted me to write about this.

Ask someone a simple question; would you prefer negative or positive? The answer is very obvious. Without asking what the question is about, people will more often than not say “positive.”  It is this very intrinsic part of our upbringing  and nature that prefers positive over negative since the beginning of life. In movies, in epics, in fairy tales, in legends and in our real lives positive is the good thing. However, when it comes to property investment, guess what!!,  we seem to be more inclined towards favouring the negative. You guessed it right. I am here talking about negative gearing which comes from incurring a loss by maintaining an investment property and claiming a tax deduction for the loss and then smiling when we receive a hefty tax refund from the ATO.  Whether this is the correct approach to take is a debatable topic. At least the government wants it that way, hence the laws favouring negatively geared properties, and hence taxpayers are convinced negative gearing is a good thing.

Traditionally the focus has been to offset the loss from the investment property against assessable income and then receive the tax credits that arise from the reduced income in the way of a refund. You see your property grow in value over time, so the money that is going out each year seems to actually turn out to become your secret investment that grows over time. This is negative gearing,. However,  it seems the government is planning a retreat from these laws and that then prompts us to think about the opposite. Yes, the answer is Positive Gearing!

 Every part of this article is based on my understanding of the basic tax laws, interest rates, loan products and structuring. You must not rely on any content of this article as an advice. You should seek appropriate legal and financial advice related to your personal circumstances.  Any and every part of this article is general in nature and much of it is argumentative and introspective than conclusive.

The arguments to consider here are; how can we have a positively geared property? Whether this is the right strategy to take? Why do we have such laws?  What benefits could we receive from a positively geared property? Are the laws going to change to the detriment of the citizens?

In a positively geared property rent generally ousts the interest repayments and other expenses. It is generally understood a 7% return on an investment is a good one. They say, If you find something returning 7% snap it.  I am not here to discuss what property you should buy or avoid,  however what property you buy matters a lot. A general idea of an area and just knowing the area well may not essentially be the catalyst to make a decision and/or a consideration.  Choosing the right property is one of the most important decisions to make. I cannot stress more how important it is to choose the right one and keep an eye out for the lemons.

Now then; currently we are in an era where Australian interest rates are historically low and that they can go lower. This very ingredient trumps a positively geared property.  You buy a property that returns 5-7% and then get a loan which is fixed or variable below 4.5%. There you go you are now positively geared. You need to place a deposit on the property, the higher deposit, the higher the positive gearing and this investment will now put money into your pocket. Compare this to what you already know about negative gearing. Obviously you have to incur a considerable amount of loss to receive a fraction of that in Tax refund. Noteworthy though is that this is being possible because interest rates are historically low.

To give you an idea, if an individual is on a $80,000 wage and loses $20,000 on an investment property the tax refund he could get in the 2016 FY would be approximately $6900 due to the investment property. Well, keep in mind you were out of pocket $20,000 to get the $6900. In short after the refund you end up with a loss of $13,100. Also more often than not there is some depreciation claimed on this, which may not be a part of your out of pocket expenses but bear in mind you are getting this deduction because you paid a higher purchase price to buy a brand new/newer property upfront.  Now the other aspect to note is that the value of land appreciates over time and a building depreciates over time and this can affect the capital gains on the property.

Now unless you make a capital gain on the property higher than your out of pocket expenses you will in fact lose money on the investment even after the tax benefit.  Also too, to gain asset protection a positively geared property could be purchased within a trust because a loss from a  negatively geared property will get trapped within a trust and such a loss will be offset against future gains within the trust. Hence, a trust may not be the correct option when considering a negatively geared property, but could be if the property is positively geared.  Where you do feel there will be substantial capital gains in the future you may not mind a temporary loss now. However no one has a crystal ball and can predict the future accurately and there is no guarantee properties will be the best investment for the next decade because they have been for the previous one.  My comments should not be interpreted in meaning property investment is not a good thing. My point here is; it could be a great one if carefully researched, structured and implemented. A smart, calculated and planned move will get you benefits in any market, in any continent and in any circumstances.

The question now shifts to why do we receive negative gearing tax benefits? Well, as you may understand, the value of our economy, private wealth, retirement investments, equities, group funds and many managed investments are all tied to property. People may not have any savings but they may have equity in their properties. This is Australia’s savings. Our savings is all we got and that in fact is our property(ies).  This equity we use to borrow more and invest in other properties. This results spending growth, construction activity growth and this supports our GDP. Construction activity is a key factor contributing GDP.  On the other hand we all hate taxes, so if there was a legal way of saving taxes people would accept it with both hands.  Hence, the origination of negative gearing tax benefits that motivates people to invest in property and in return benefits the GDP by creating construction activity. Higher the GDP, better the prosperity of the country, people happy, government happy.

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