Negative Gearing

Back in the “good old days” we had no capital gains tax in Australia and it occasionally made some sense to add to your cost for a property to engage in negative gearing. In its simplest form this kind of “gearing”(aka “borrowing”) meant paying out more in tax deductible interest and other expenses associated with a rental property you had bought in the expectation (?hope) that at some time in the future you would sell the property at a handsome tax free capital gain.

Capital gains tax added a new dimension to this financial manoeuvre but I despair of anyone whose sole aim in negative gearing is to get a tax deduction.

I once used the term “positive gearing” in an article I wrote and more than one person looked at me blankly and said “ I’ve never heard of positive gearing, what is it?”.

Polonius farewelled his son Laertes with the admonition.. “neither a borrower nor a lender be” which would be OK for a father sending his teenage son off to Schoolies Week but definitely not be appropriate when the son is off to make his fortune in the grown up commercial world.

If the Federal Government chose to disallow tax deductions for negatively geared rentals the legislation is already in place in respect of “non commercial losses”. These can only be set off as deductions against eventual profits made from THAT commercial venture, namely buying a rental property with borrowed money which you eventually hope to recoup when selling at a profit.

I suspect that if they did this it would put a bit of a hole in Australia’s real estate market.