by Brian Hoult

With the end of the financial year fast approaching our minds turn to matters of Income Tax. With that in mind it might be appropriate to revisit the tax issues involved with the negative gearing of investment property – both commercial and residential.

Put simply negative gearing occurs when the income generated by an investment property is less than the borrowing costs and outgoings associated with the investment property.

This means you have taken out an investment loan to purchase an investment property, and the interest and outgoings are greater than the rental income resulting in a loss.

This loss can then be offset against income from other sources thereby reducing your ultimate tax liability.

Whilst this benefit is worthwhile, there needs to be a potential for capital gain in the medium to long term so as to make the investment beneficial.

INCOME TAX DEDUCTIONS

INTEREST

Interest on the loan taken out to purchase the investment property is fully deductible.

Interest on any other borrowings taken out with respect to the investment property are also fully deductible. For example and additional loan taken out to replace the roof.

DEPRECIATION

Fixed Assets such as Furniture , Appliances etc are able to be depreciated over a period of time and this amount is fully deductible.

BUILDING WRITE-OFF

Similar to Depreciation a building allowance may be claimed for residential income producing properties constructed after 18 July 1985.

It may be prudent to engage the services of a quantity surveyor soon after the purchase date so as to maximise your claim in this area.

OTHER EXPENSES

Other outgoings incurred with respect to the day to day management of your investment property will also be deductible , these include:

Management and Agents Fees
Tax Agent Fees
Insurance
Borrowing Costs ( subject to specific rules )
Mortgage Insurance ( subject to specific rules )
Council Rates
Water Rates
Repairs to the Property
Cleaning
Pool Maintenance
Gardening
Body Corporate Fees ( subject to specific rules )
Inspection Costs ie Travel and Accomodation Expenses.

INCOME TAX WITHHOLDING VARIATION

If you are an employee having PAYG instalments deducted from your wages on a regular basis and you have a negatively geared investment property you can apply for a reduction in your PAYG instalments via the tax office.

RECORD KEEPING

Legislation requires taxpayers to retain all records relating to your investment property for five years (for both income and expenses) . All records relating to the purchase and sale of the property must be retained for a period of five years after the sale of the property.

Brian Hoult is a Chartered Accountant for MGI - Business Solutions Worldwide. He'll be bringing you more tax tips in the weeks to come on The Newsport.

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