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What Is Negative Gearing And How Does It Actually Work?

Residency and Tax Considerations

10(1) and 10(2) of Section 6 it has been  stated  for an individual  resident in Australia his/her world wide income both ordinary and statutory income shall be  taxable in Australia while for a non-resident only the income earned in Australia shall be taxable.

In terms of Section 6(1)(Anon., n.d.)of Australian Income Tax Assessment Act, 1936 the term resident and resident of Australia has been defined. The term shall mean a person shall be considered resident of Australia if he satisfies any of the three tests stated here-in-below

  • Resides Test: For this test, we look at the person’s permanent dwelling place or for a considerable period of time. This test has been dealt in depth in the following judgements:
  • Levene v IRC [1928] AC 217;
  • IRC v Lysaght[1928] AC 234;
  • TR98/17

Under the said judgement it has been highlighted that if an individual has family connection in Australia or one has a habitual abode he shall be considered tax resident in Australia.

Domicile Test: For this test, the authorities generally look at the place of birth of individual along with permanent home. Under the Australian Domicile Act, 1982 a person domicile id determined at birth and same shall continue until he extinguishes the same. Further, for determining the  permanent place of abode one need to look at place where one sleeps  and stay with his familyThe same has been stated in the following cases:

FCT v Applegate 79 ATC 4307;

FCT v Jenkins (1982) 12 ATR 745 ;

183 Days test: For this test, the tax authorities generally check for the number of days an individual stayedin Australia. If such day count, exceed 183 days then the individual is considered a tax resident. In addition the test shall hold good unless any of the following conditions are triggered:-

  • The individual has a house of permanent nature outside Australia;
  • There exists no intention among individual to take up residence in Australia.

On the basis of above, it may be seen, the number of stay days in Australia exceeded 183 days and there has been an acquisition of permanent abode in Australia. Further the stay period in Australia exceeds two years. Thus, on the basis of the above it may be concluded that you and your wife may be considered tax resident of Australia.

In the present circumstance, Jack has been working with MD & A Architects during the captioned year. He has received salary form his employer and the same is taxable under the Australian Income Tax Assessment Act. Further, the employer has deducted PAYG (Pay As You Go) on his income which is generally deducted on the basis of individual estimated tax liability while the actual tax liability may differ. Thus, Jack while filing tax return has to pay the difference or claim the refund for the same. (Powerbuy technologies, 2018)

Tax Implications of Salary and Investments

Under the said case , since Jack travelled to and fro his office as a part of daily routine  said shall be treated to be incurred for generating income of a private or domestic nature and accordingly shall  be allowed to be claim as deduction in terms of Section 8-1(2)(b) of Income Tax Assessment Act, 1997.However, if jack had travelled to another workplace and the same was not a part of routine activity, he shall be able to claim deduction to a maximum of 5000 business kilometres and maximum of 66 cents per kilometre as log book is not maintained..(Commonwealth of Australia, 2018)

Further, for PAYG deducted the same shall be deducted while paying the tax amount under the return.

Under the Australian tax system, a resident is required to provide Tax File Number known as TFN to bank for the purpose of receiving interest taxed at lower rate. If the person fails to do so, he shall be liable to pay tax at highest marginal tax rate and same shall be deducted while making payment.(Powerbuy technologies, 2018)

Under the Australian Tax system, if a resident earn under dividend reinvestment scheme any UN franked dividend and if the same dividend is reinvested than it will be deemed to be dividend earned and tax shall be chargeable on the dividend earned amount.(Powerbuy technologies, 2018).

Thus on the basis of above earned dividend amount invested in shares shall be chargeable to tax as it is deemed to be dividend earned

Under the Australian Tax system, Capital gain tax is levied in case of selling the shares at profit and tax is levied on such gain.

1000 ANZ bank share on 1 March 2015 purchase by Jakeat $ 22 each with brokerage cost $50 and sold 500 shares on 1 June 2018 for $ 24 each and brokerage cost $55.

Total Selling price of 500 shares= (500*24-55) =    $11945

Total Purchase price of 500 shares= (500*22+25) =$11025

And as the holding period is more than 12 months than a further discount of 50% shall be given.

Under the Australian Tax system, Capital gain tax is levied if a person sells something out of his daily business activity than any gain or loss arising from such activity shall be chargeable to tax.

Cricket bat bought by Jake between 1999 and 2004 and he sold the same at $ 900 which cost him $ 2600, sothere is a capital loss amounts to $ 1700 for Jake.

Capital Gains Tax

Under the Australian Tax system, if one incur car expenses for person and business use so the resident must have all the material support documents to it for the distance travel for business and personal use under log book method.

As failure by Jaketo maintain a logbook but he has still managed to maintain a diary keeping records of all the supporting documents so on the basis of above Jake can claim the deduction.(Commonwealth of Australia, 2018)Including depreciation the total expense of car amounts to $6200 so Jake can claim 95% amount value=$5890 if he has all supporting documents of the car used for business use.

Under Australian Taxation rule, expenses incurred for office will be eligible for deduction provided supporting documents are kept with respect to use.

As Jake is using the mobile phone for office and personal purpose both but does not have any material support evidence to claim the amount used the office purpose,so Jake will not be allowed to claim the expenses incurred on mobile phone.

Under Australian Taxation system, Section25-5 ITAA97 states that deduction shall be allowed if expenses are incurred in relation to paying accountant fees or agent fees for filing tax return.

On the basis of above Jake will be eligible for the paid invoice amounted to $400.

Under the Australian Tax, holding of medical insurance policy is compulsory for the Australian tax resident otherwiseMedicare levy surcharge is imposed on the basis of income of the individual.

On the basis of above Medicare levy surcease will be imposed on Jake as he is not covered with any medical policy.

Computation of Taxable Income

Sl. No.

Particulars

Amount

Amount

1

Salary

86000

2

Un franked dividend

3500

3

Capital Gain Income

920

460

4

Travelling expense

-5890

5

Payment to tax agent

-400

6

Taxable Income

83670

Negative gearing is a form of financial leverage and if one is keen in investing in property than one should properly analyse the positive and negative aspects of negative gearing.Negative gearing is the case in which the borrower borrow money to purchase an income generating assets but the return derive from such an asset is less than the cost spend on acquiring such assets, this is called as negative gearing. The property can be said to be positively geared when the return from your investmentsare higher than the outgoing interest.Employees and negative gearing benefits can be taken in wide range and through negative gearing property losses can be set off from other types of income such as wages or income with a few restrictions on it.(Commonwealth Bank of Australia, 2018)

There are two types of tax gearing positive gearing and the other is negative gearing.

  • Under Australian Taxation rule, any loss can be adjusted against other income earned such as salary, wages thereby reducing your taxable income and also the tax portion on your income.
  • Interest paid on loan can be claimed thus reducing your tax liability(Commonwealth Bank of Australia, 2018)

Thus, negative gearing has its own pros and cons as negative has the benefit to reduce your tax liability through smart tax mechanism and planning system and acting within the guide of Australian rules, and positive gearing too has its own impact on the income and tax of the individual.

 In brief we can say both gearing i.e. negative and positive has its own advantages and dis advantages depending upon how one plan their tax mechanism.(Commonwealth Bank of Australia, 2018)

References:

Anon., n.d, INCOME TAX ASSESSMENT ACT 1936 - SECT 6, [Online]
Available at: https://www5.austlii.edu.au/au/legis/cth/consol_act/itaa1936240/s6.html
[Accessed 12 September 2018].

Commonwealth Bank of Australia, 2018, What is negative gearing?. [Online]
Available at: https://www.commbank.com.au/guidance/property/negative-gearing-and-tax-201605.html
[Accessed 12 September 2018].

Commonwealth of Australia, 2018, Car expenses, [Online]
Available at: https://www.ato.gov.au/individuals/income-and-deductions/deductions-you-can-claim/vehicle-and-travel-expenses/car-expenses/
[Accessed 5 September 2018].

Commonwealth of Australia, 2018, Logbook method, [Online]
Available at: https://www.ato.gov.au/Business/Income-and-deductions-for-business/Deductions/Motor-vehicle-expenses/Claiming-motor-vehicle-expenses-as-a-sole-trader/Logbook-method/
[Accessed 5 September 2018].

Finder AU, 2018, What is negative gearing and how does it actually work?, [Online]
Available at: https://www.finder.com.au/what-is-negative-gearing
[Accessed 5 September 2018].

Powerbuy technologies, 2018, Tax fully franked versus unfranked dividend, [Online]
Available at: https://www.powerbuy.com.au/blog/tax-fully-franked-versus-unfranked-dividends/
[Accessed 12 September 2018].

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