Gearing versus Cash flow. What’s the difference?

Tuan Duong

Gearing versus cash flow on an investment property. What is the difference?

We’ve mentioned previously the differences between negative and positive gearing. We also delved into the tools available to boost cash flow to improve this gearing position i.e. loan structures to minimise interest rates and reduce those interest repayments. Crucially important for the avid investor, is understanding the differences of gearing and cash flow.

It is possible to find a rental property that is negatively gearing yet at the same time yield positive cash flow. How?

Tax offset

Tax relief from the Australian Tax Office (ATO) is provided whereby the investor or landlord endures an overall net loss on the property i.e. negative gearing. In any case, where this is true, a net loss that arises will be applied as a tax deduction. Ultimately providing tax relief. Tax offsets against the investor’s total income where there is a total net loss on the rental property, can draw back some of that money by way of a tax refund. In some cases where we include depreciation into the calculations, this can switch a property from one that has negative gearing with negative cash-flow to one that is negative gearing with positive cash-flow.

Depreciation on the building and its contents (Division 40 – plant and equipment), can be deducted as the ATO classifies this as a loss made on the property. However, considering depreciation is a non-cash deduction (merely an on-paper-loss), it provides tax relief without costing the investor a cent, besides the cost of obtaining the report. Merely a dent on the budget when Duo Tax depreciation schedule costs $650 which allows you to depreciate $300,000.00 on the average Australian-built home from a single report!

Example of tax depreciation calculation to indicate gearing and cash flow:

Landlord’s income is $50,000

The tax rate is 30%

Rent: $2,000 per month

Expenses: $1,800 per month (excluding depreciation, includes insurance, interest on loan, rates, and management fees)

Total net loss: – $200 per month

Tax refund entitled to due to loss: $200 x 30% = $60

Total net-loss after refund = – $200 + $60 = – $140

Net loss after all tax offset is $140 and hence is a negatively geared property with negative cash-flow

Now we include a Duo Tax depreciation schedule:

Depreciation on average Australian home: $6,800 p.a. OR $566.67 per month

Tax Refund on $566.67 = $566.67 x 30% = $170

– $140 before refund on depreciation

+$170 refund with tax depreciation schedule

Net cash position is +$30

Depreciation is still considered a loss or an expense and hence still leaves us in a negatively geared position. However, we achieve positive cash flow just by obtaining a depreciation report

Duo Tax team working together

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Disclaimer: Please note that every effort has been made to ensure that the information provided in this guide is accurate. You should note, however, that the information is intended as a guide only, providing an overview of general information available to property investors. This guide is not intended to be an exhaustive source of information and should not be seen to constitute legal or tax advice. You should, where necessary, seek a second professional opinion for any legal or tax issues raised in your investing affairs.

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Tuan Duong

Tuan is an award winning Quantity Surveyor and leads Duo Tax Quantity Surveyors – Australia’s fastest growing provider of Tax Depreciation.

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