What is negative gearing and how does it work in QLD?

Negative gearing is a cornerstone of property investment in Australia. While it is a financial strategy rather than a legal one, it has significant legal implications for how you structure your property purchases and tax compliance.

1. How the Math Works

An investment is “geared” when you borrow money to buy it.

• Neutral Gearing: Rent equals expenses.
• Positive Gearing: Rent is higher than expenses (you make a profit and pay tax).
• Negative Gearing: Expenses (interest, rates, maintenance, insurance) are higher than the rent.

2. The Tax Advantage

If you lose $10,000 a year on your investment property and you earn $100,000 in your job, the ATO allows you to deduct that $10,000 loss from your $100,000 salary. You are then only taxed on $90,000. This “tax shield” helps investors hold onto property while they wait for long-term capital growth.

3. The Role of Depreciation

You can often claim “non-cash” deductions for the wear and tear of the building and its fittings (e.g., carpets, blinds). This is called Depreciation. A high depreciation schedule can turn a property that is cash-flow positive (money in the bank) into a negatively geared loss on paper, providing a tax benefit without an actual out-of-pocket loss.

4. Legal Structuring for Gearing

How you own the property determines who gets the tax benefit:

• Individual Name: You get the full deduction against your salary.
• Joint Names: You split the deduction based on ownership percentage.
• Discretionary Trust: Losses are “trapped” in the trust and cannot be distributed to individuals to offset their personal salary.
• SMSF: Limited tax benefits (15% cap) and no offset against personal income.

5. Potential Risks

Negative gearing only works as a wealth strategy if the Capital Growth of the property over time is greater than the total losses you have sustained. If property prices stagnate, negative gearing is simply losing money.

Related Topics

• Buying Property in an SMSF
• Conveyancing Process QLD
• Property Law Practice Area

Get the Right Structure

Before you sign a contract for an investment property, you must decide on the ownership structure. Changing your mind after signing can trigger double stamp duty.

Buying an investment? Contact Bell & Senior today for a contract review. Call (07) 5532 8777.