Hello,
I’ve been researching and improving my knowledge in regards to investing for about three months reading many books however there is one thing that has consistently confused me. I understand that interest on a loan that is borrowed for income purposes is tax deductible but why does it never seem to me to be factored into the working examples. For instance below is a an example showing the refund that is possible for negative gearing (i’m personally not interested in negative gearing and will be looking for positive) but I can’t see where there loan interest and the deduction comes into play.
Rent recieved for the year $15000
Less: Cash expenses
Bank Fees $300
Council Rates $1100
Body Corporate $1200
Insurance $700
Interest Paid $16000
Property Management $1000
repairs $1000
water rates $400
TOTAL CASH EXPENSES $21900
CASH SHORTFALL (6,900)Less: NON-cash expenses
Decline in value (deprecition) $3700
Capital Works Deduction $3300
Borrowing Costs Amortised $500
Total Non-Cash expenses $7500
TOTAL RENTAL PROPERTY LOSS ($14400)Cash shortfall from above – $6900
Less Tax Refund
Marginal Tax Rate Tax Refund After Cash Tax Shortfall31.5% ($14400 x 31.5%) = $4536 $6900 – $4536 = $2,364
What am I glaringly missing? I can see depreciation, I can see capital works deductions but where are the tax deductions for costs such as the property agent’s commission and the loan interest? I thought (most probably wrong) that where the interest paid was $16000 that you would receive 31.5% (or whatever the tax rate is) of 16000 – 5040
I would be extremely grateful if somebody could put me right!
Thank you as always
Interest Paid $16000
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Hi Terry,
But do you not receive a tax deduction equal to your marginal rate for this cost?
Put another way I have been figuring from what i’ve read (obviously wrong!) that you’d work it out like this
Interest paid $16000 but tax deductible and therefore 31.5% of $16000 is $5040 – I therefore recieve back $5040
Property management $1200 but tax deductible and therefore 31.5% of $1200 is $378Where is my logic failing me :(
Put another way I have been figuring from what i’ve read (obviously wrong!) that you’d work it out like this
Interest paid $16000 but tax deductible and therefore 31.5% of $16000 is $5040 – I therefore recieve back $5040Property management $1200 but tax deductible and therefore 31.5% of $1200 is $378
Where is my logic failing me :(What about the rental income you are earning?
You add up all the costs and then deduct this from the rent. If there is a loss this means you are negatively geared. If positive you are postively geared.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Sorry to sound confrontational because i’m really not but what do you mean ‘what about the rental income you are earning?
I didn’t realise that the rental income had an impact on the tax deductions. Are you saying that if the rental income on a property exceeded all its outgoings that you could not then claim for interest on the loan?
I understand the negative and the positive bit.
Hi Chat,
I can’t see where there loan interest and the deduction comes into play.
First, the loan Interest ($16k) is totalled along with the other expenses:-
TOTAL CASH EXPENSES $21900 – ($16k of that is Interest)So, with $21,900 of costs and $15,000 of rental income, the cash LOSS is $6900.
That $6900 is then added to the Non-Cash losses (depreciation, capital works, etc) of $7500 to total $14,400.
At Marginal Rate of 31.5%, you get this deduction:-
$14400 x 31.5% = $4536 which is a refund to offset the $6900 in actual cash losses.I thought (most probably wrong) that where the interest paid was $16000 that you would receive 31.5% (or whatever the tax rate is) of 16000 – 5040
Well, if you had no Rental INCOME to offset those costs, then you would be claiming a much higher cash LOSS figure. But the $15k in rent covers a big percentage of the expenses upfront, leaving you with just $6900 in cash losses. Then you add the non-cash losses (that didn’t cost you in this year) and get a $4536 Tax Return. Not too shabby.
Benny
Thanks alot Benny. I think i’ve finally cracked it. Am I right in thinking that if it was positively geared – rental income greater than all expenses that you can still get depreciation? or Capital Works Deductions?
Hi Terry and Chat,
I was so busy penning a reply to the first question that I missed all of the subsequent answers and questions. So, sorry if it looks like I was butting in.I think I see where Chat is getting things confused – if I can make one further comment, it might help:-
Are you saying that if the rental income on a property exceeded all its outgoings that you could not then claim for interest on the loan?
Well, whether positive or negative, you actually ARE claiming BOTH income and expenses.
e.g. When you say you expected you could claim for the full amount of $16k in Interest – Well, YES, YOU CAN. But then, you MUST also pay the Marginal Rate OWING on the Income that you receive of $15k!!
Sound fair? In actuality, we subtract expenses from Income to find out how much the ATO pays us (if negative geared), or how much extra Tax we pay the ATO (if positive geared).
Am I right in thinking that if it was positively geared – rental income greater than all expenses that you can still get depreciation? or Capital Works Deductions?
That sounds right to me.
Benny
You’ve definately cleared things up! greatly appreciated. I’ll get there I will!
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