NEGATIVE GEARING DEDUCTIONS
The consequences of allowable deductions for individuals will depend on the type of assessable income earned.
Deductions from salaried income (from which employers are obliged to deduct tax instalments) will generate a tax refund the size of which depends on the relevant taxpayer’s marginal rate of tax payable in respect of the following income year. Where it is evident that a salaried individual will be entitled to significant allowable deductions during an income year, he or she is entitled to request that the ATO authorise the employer to vary the amount required to be withheld under PAYG Income Tax Withholding, by completing a PAYG Income Tax Withholding Variation form. Care should be taken, as a variation that in hindsight was overly generous may be penalised.
THE MAIN PURPOSE OF VARYING THE RATE OF WITHHOLDING, IS TO ENSURE THAT THE AMOUNTS WITHHELD DURING THE INCOME YEAR BEST MEET THE INVESTORS END OF YEAR LIABILITY.
BORROWING AND INTEREST EXPENSES
Where a taxpayer borrows money and invests that money for the purpose of earning assessable income or as part of a business carried on for that purpose, interest on these borrowings will generally be an allowable deduction for income tax purposes under Section 25.25 of ITAA 1997. Thus, interest on money borrowed to acquire a rent producing property would generally be deductible, whereas interest on money borrowed to acquire vacant land (which did not produce any income) would generally not be deductible.
Borrowing expenses incurred in taking out a loan for the property includes: establishment fees, valuation fees, title search fees and costs for preparing and filing mortgage documents. The total cost of the borrowing is spread over 5 years, or the term of the loan, whichever is the lesser.
A deduction for interest effectively reduces the taxpayer’s net cost of borrowing by an amount, which depends on the taxpayer’s top marginal rate of income tax. Thus, taxpayers on the top marginal rate of 46.5% (including Medicare levy) save approximately this percentage of each dollar spent on the interest, and will particularly benefit from such interest deductions. As noted above, where deductions are significant, there will be cash flow advantages to salaried taxpayers having their tax installment deductions varied rather than waiting for a tax refund.
The Tax Administration Act 1953 provides that the Commissioner may, to meet the special circumstances of a particular case or class of cases, vary the amount an entity is required to withhold from a withholding payment.
The main purpose of varying the rate of withholding, is to ensure that the amounts withheld during the income year best meet the investors end of year liability – for example: where the regular rate of withholding would lead to a large credit at the end of the incoming year – because the tax deductible expenses are higher than normal.
PLEASE NOTE: Variations are at the discretion of the Commissioner of Taxation.
Where the outgoing deductions associated with an investment exceed the assessable income derived from the investment in any particular year of income, the investment may be described as being “negatively geared”. If so, the excess of the allowable deductions can be used to reduce the tax payable on other assessable income of the investing taxpayer.
Changes were made to the depreciation system for assets acquired or commenced to be constructed after 11.45 am on 21 September 1999, the most important being that depreciation rates are to be fixed by reference to the effective life of each asset.
For assets acquired between 27 February 1992 and 11.45 am on 21 September 1999 the actual depreciation rate was higher than the basic rate by an added 20% loading. This provided accelerated rates of deduction for depreciation. Another important change that applies after 11.45 am on 21 September 1999 is the option to work out a new effective life depreciation rate if you conclude that the effective life being used is no longer accurate, because of certain changed circumstances. Prior to 21 September 1999, even if the asset was not new when it was acquired, it is to be assumed that the asset was new when estimating the effective life. This means that the effective life cannot be reduced because the asset is second-hand.
SOURCE: Guide to Depreciation 1999-2000, Australian Taxation Office.
MORTGAGE DISCHARGE EXPENSES
Expenditure incurred in borrowing money or in the discharge of a mortgage is normally capital expenditure, which would not fall within the scope of the general provisions of Section 25.30 of ITAA 1197. However there are allowances for a deduction for certain borrowing expenses and for certain mortgage discharge expenses. Expenses such as procuration fees, legal expenses, stamp duty, valuation and survey fees are deductible, where such borrowed monies are used or are to be used for income producing purposes.
The deduction under this section is not restricted to payment made or due at the time of the loan; it extends to payments to be made during the life of the loan pursuant to a contractual obligation which was incurred at the time of borrowing as an incident of establishing the loan. The expenses are deductible over the period of the loan or five years, whichever is the shorter period, beginning with the year in which they were incurred. If borrowing expenses incurred in any year are $100 or less, they are wholly deductible in that year.
You can claim a deduction for some of the expenses you incur for the period your property is rented, or is available for rent. However, you cannot claim expenses of a capital nature or private nature. When you claim a deduction for expenses incurred in gaining your gross assessable rental income, there may be situations where the expenses need to be apportioned between deductible and non-deductible expenses.
IF THE PROPERTY IS NOT AVAILABLE FOR RENT FOR THE FULL YEAR
EXPENSES THAT YOU MAY BE ABLE TO CLAIM INCLUDE: