WHAT IS THE DIFFERENCE BETWEEN
NEGATIVE AND POSITIVE GEARING?
The term ‘negative gearing’ simply refers to a situation where the deductible expenses exceed the income of the asset. Under Australian Law, the net loss can be deducted from assessable income derived. Tax deductions can include both expenses such as interest payments on borrowed funds and related property expenses, and on expenses that are not paid for such as depreciation.
For example, with a residential property, if the mortgage payment and expenses on the property exceed the rental income from the property, it is negatively geared. In other words, the investment income is negative, which allows the investor to claim the difference as a tax deduction.
Where the income is less than the outgoings, resulting in a net loss, this is deductible against the investor’s assessable income.
The term ‘positive gearing’ is perhaps the corollary of the Negative Gearing definition above, where the income exceeds the outflow for the investment.
For example, with an investment property if the rental income exceeds the mortgage payments and expenses including any depreciation, it is positively geared. In other words the income is positive and therefore taxable.
If a large enough deposit is used so as to enable the rental income to be equal to or greater than the outgoing mortgage payments and costs, then a positively geared situation occurs.
This way, there is no reliance on a tax deduction, or the need for an investor to use their own cash flow to hold the asset.
NEGATIVE GEARING WITH POSITIVE CASH FLOW
This occurs when your rental income exceeds your out of pocket \
expenses, without the depreciation benefit. So the investor can claim more expenses than the income earned yet not have physically paid for more expenses than the actual amount of income accrued.
This facilitates putting in place a structure that allows for all the valuable tax deductions of negative gearing, but which provides a cash flow, such as to render the incomes and outflows neutral, or even cash flow positive, which can produce excess income if the investor chooses to receive a passive income stream.
An investor might then purchase an investment property using a 100% plus costs loan and instead of placing dollars into the property they have purchased, they might choose to purchase an income stream as produced by a Cashbond annuity. The income stream could be purchased to provide for the weekly cash flow shortfall or more, which will cover the cost of holding the asset.
This structured gearing approach is especially useful when acquiring subsequent investment properties. By using ‘Structured Gearing’, investors can produce a high level of passive income to subsidise their current and future income requirements.