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How negative gearing works

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Negative gearing is a popular tax strategy that gives investment property owners the ability to offset the cost of owning a property against their assessable income.

Negative gearing involves generating short to medium term tax losses, which arise from tax-deductible costs that are higher than investment income, and leveraging this to increase exposure to potential gains and losses.

It is a popular strategy due to its ability to reduce an investor’s taxable income through their tax losses, resulting in a lower annual income tax bill.

For example, if the rent of a property was $350 per week, and the property was fully tenanted for a full financial year, the rental income would be $18,200. If the deductible expenses for that year were $30,000, the net rental loss would be $11,800. The $11,800 loss can then be applied to reduce the property owner’s taxable income.

Under Australian income tax law, property owners can claim a tax deduction for any cost they incur if it is sufficiently connected to their investment property. Non-cash expenses, such as depreciation, can also be deducted. General tax deductions relating to rental income include:

  • Borrowing costs
  • Council rates and water fees
  • Depreciation on assets
  • Property inspections
  • Repairs and maintenance

While negative gearing carries many benefits to property owners, the strategy isn’t without pitfalls. Negatively geared property results in a loss, so before committing to the strategy, it is worth considering aspects like what will happen if you cannot fill your rental property at any one time, or if there is a dramatic turn down in property values and your investment fails to increase in value.

Five ways to pay less FBT

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Small businesses can achieve real dollar savings by efficiently managing and calculating the Fringe Benefits Tax on meals and entertainment. However, the challenge is often finding the best calculation. Many organisations struggle to identify which calculation method is best for them and, as a result, have to pay more FBT than necessary.

Here are five FBT strategies that may help small businesses get ahead:

1. Automate the expense management process
Automating the process allows a business to determine the lowest FBT liability automatically. It saves time, provides full visibility into expenses and enforces policies to optimise the expense management process.

2. Use clear, descriptive definitions for the expenses
Over-complicated definitions can confuse employees and impact on the quality of data (from a calculation and compliance perspective).

3. Train employees
Make sure employees understand the difference between the travelling and non-travelling employee status, as this impacts the FBT liability.

4. Use an employee master list
An employee master list simplifies the search for employee data and prevents the creation of multiple versions of the same attendees.

5. Review the RBT reporting annually
Don’t assume a specific calculation method will always equate to the lowest FBT liability. Make sure you are using the right method to avoid overpayments occurring.

Making tax-deductible super contributions

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There are two types of super contributions individuals can make: non-concessional (after-tax) and concessional (before-tax).

From 1 July 2015 to 30 June 2016, eligible individuals can make concessional contributions of up to $30,000 per year if they are 48 years of age or under on 30 June 2015. Eligible individuals who are 49 years of age or over on 30 June 2015 can make concessional contributions of up to $35,000 for the year.

Those who are self-employed or not employed can claim a tax deduction for their super contributions as they are treated as concessional contributions.

Individuals who are under the age of 18 can only claim a tax deduction for super contributions when their income comes from gainful employment, such as carrying on a business.

In most circumstances, those who are classified as employees cannot claim a tax deduction for making a super contribution. However, they can receive a similar tax benefit through salary sacrifice contributions.

Although the rules for claiming tax deductions on super contributions can be complex depending on the type of work an individual does, generally speaking, an individual can claim a tax deduction for super contributions if they:

  • are self-employed and not working under a contract principally for your labour.

  • are not employed

  • can satisfy the 10% income test rule. To satisfy this test, individuals need to prove that they receive part of their income as an employee but less than 10% per cent of their assessable income (including salary sacrifice contributions and reportable fringe benefits) are attributable to employment as an employee.

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