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Negative Gearing 101 – What is Negative Gearing and what does it mean? Find out Now!

Categories: Video Commentary
9 May 2016

Hello it’s Scott Trevethan here from Scott Partners.  There has been lots of talk in the media and from both sides of politics about negative gearing.  But what is it?  Scott Partners are dedicated to supporting our clients with the very best in property advice and assistance where appropriate so this is the first in our series around Negative Gearing.  Just a quick 2 minutes and you will be able to chat with your friends about what it is and what Negative Gearing really means.

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Hi there. My name’s Scott Trevethan from Scott Partners. A lot of clients have asked me, “What is negative gearing?”, so I thought I just might take a few minutes in this unscripted video – which just means I may repeat things and waffle a little bit – to explain to you guys what negative gearing is and why it’s a great way to be able to build wealth outside of the usual things, like shares and just saving money.

So, first of all, what is gearing? Now, gearing is simply using borrowed money to purchase an asset that you may not have been able to purchase with the money that you’ve already saved. For example, if you’d saved up $10,000 but you wanted to buy an asset with $100,000, then you simply borrow $90,000 and buy a $100,000 asset. So that’s called gearing. We were able to buy a $100,000 asset with just $10,000 of savings.

Now, why is that important and good? Well, it’s good because $10,000 increasing at a rate of, say, 10% per annum, the next year it would be worth $11,000, and the year after that it would be worth $12,200, etc. After five years, the $10,000 is only worth about $15,000 on a 10% growth rate. Whereas if you use gearing, your $100,000 asset goes up in value, but your bank loan doesn’t, which means that you get to enjoy the benefits of the increased asset and the rise in that increased asset. So in my example, $100,000 going up 10% is worth $110,000 in that first year. That’s a $9,000 gain on if you just increased your $10,000 by 10%.

So, gearing is great. Gearing is just borrowing to buy an asset that you otherwise couldn’t afford to buy.

What’s negative gearing, then? Negative gearing is all about the interest being more than the income that you’re earning from that asset. In our simple example, we might have, say, a house, which is typically what’s negatively geared. Let’s say it’s a $100,000 house; we’ll just rewind back for about 10 years, just for ease of numbers. Let’s say it’s being rented out at let’s say $8,000 a year. Let’s say our interest on that $100,000, the $90,000 we borrowed, was more than $8,000 a year. Let’s say it was $9,000 a year. That’s called negative gearing, and the reason it’s negative is because we’ve made a loss. Our $9,000 worth of interest less our $8,000 worth of income means that we’ve actually lost $1,000, which is a real tax loss.

 

Now, the current tax laws state that negative gearing is great, because we can use it to offset our other income, like our employment or our salary & wage income. Which means we have a $1,000 tax deduction, which can also help to offset the costs of owning our property and negatively gearing our property. Because most property, when we purchase it, we leverage it so high that it is negatively geared.

 

Negative gearing is not important in all cases. In fact, it may not be the aim in a lot of cases. You may be aiming to be positively geared, which means you actually make money; your rent is more than the interest that you pay on it, which is a great thing. And over time, our negatively geared assets will move so that they are positively geared because of the nature of the increasing value of the asset. So negative gearing is good, and it can certainly help to buy an asset.

 

If you’d like to learn more about negative gearing – because I could go on all day, but I won’t – if you’d like to learn a little bit more about negative gearing, please don’t hesitate to contact one of our client service managers or myself or you can look at our website at www.ScottPartners.com.au.  You can call us on 03-8686-9000. Like us on our Facebook page, or you can also go to Small Business Heroes. That’s a Facebook group.
So, this is Scott Trevethan; I’m from Scott Partners. This has been an unscripted video on negative gearing. Look forward to talking with you next time. Bye.

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