Negative gearing s a commonly used term used to describe a situation where expenses associated with an asset (including interest expenses) are greater than the income earned from the asset. Negative gearing can apply to any type of investment, not just housing.
Individuals who are negatively geared can deduct their loss against other income, such as salary and wages. This is consistent with the broader operation of Australia’s personal income tax system.
Australia’s tax system operates on the principle that people pay tax on their personal income, less any expenses (called deductions) in generating that income. This is similar to how business profits (that is, income less expenses) are taxed, i.e. tax is levied on the net profit of a business, not its gross revenue.
Deductions for costs incurred in producing income recognise that different people have different costs in producing income.
While making a loss on an investment property or shares might initially seem counterintuitive, some people are willing to do this in the expectation that the capital gain (sale price minus cost of asset) when they sell the asset will more than offset that loss.
Some people might also find themselves unexpectedly in a loss position, if they incur higher expenses or lower returns than anticipated.
Having a negatively geared asset when you have little to no taxable income will significantly reduce the tax benefit of this strategy.
The opposite of this is positively geared. This is when the rental/investment income exceeds expenses. In this situation, income greater than interest and other expenses is taxed at the individual’s marginal rates.