Gearing when it comes to property investment can be a powerful strategy for you as both an Australian expat or as a resident, as long as you are making informed choices. We are constantly bombarded with misinformation and everyone has their own opinion about whether positive or negative gearing is the right strategy.
Firstly, it’s important to recognise that there is no one-size-fits-all approaching to gearing and that what is a sensible strategy for yourself, may be completely wrong for your neighbour. Let’s start by exploring exactly what we mean when it comes to positive and negative gearing, before exploring how this impacts you as an Australian expat.
What is negative gearing?
Gearing refers to a scenario in which a property investor borrows money to purchase an income-producing asset, like an investment property, which produces income in the form of rent. Negative gearing relates to a scenario where the costs of owning the rental property, including items such as interest expenses, other borrowing costs, strata fees, maintenance and other fees, outweigh the rental income that the property is generating. Put simply, the income is outweighed by the ongoing expenses of holding the property.
What is positive gearing?
Positive gearing, as the name suggests, refers to a scenario where the income from the property, which is typically in the form of rental income, is greater than the ongoing costs of owning the investment property. To put this scenario simply, the income outweighs the ongoing ownership expenses of the property.
Which is the right option?
You would be forgiven for immediately jumping to the conclusion that positive gearing is the right way to go as it means that you are generating positive cash flow, which can only be a good thing…right?
There are a wide range of other considerations to factor in, including the tax liability generated, any lost tax credits, the sustainability of the yield, expected capital growth and many other property factors to determine whether it is in fact a sensible investment.
It’s important to note that as an Australian expat living and working in Singapore or elsewhere, that your investment property in Australia is taxed as Taxable Australian Property (TAP), which means that the rental income your property is generating would be taxable in Australia. If you’re not already aware, the following Australian tax rates apply to Residents and Non-Residents. Perhaps the greatest difference is the lack of a tax-free threshold for us as expats, with the first dollar of positive income being taxed at a whopping 32.5%.
Let’s explore a case study
Tom and Susan moved to Singapore 3 years ago and are currently working here in the lion city. They are currently exploring the idea with a property investment adviser of purchasing an investment property in Australia for $600,000. We’ve outlined some of the key financial details about the property below to keep the metrics relatively simply.
Purchase Price: $600,000
Loan Interest Rate: 4.5%
Rental Income: $400 per week
We’ve ignored other costs such as stamp duty, mortgage registration, any loan fees and otherwise, to keep the illustration of the impacts of the gearing simple. Tom and Susan’s key goal in seeking advice is to understand whether their property should be negatively or positively geared and what the implications would be under either scenario. We explore each of these options below:
Tom and Susan explore investing $300,000 of their current cash, which has accumulated in their Singapore bank account into the property, borrowing the remaining $300,000 from the bank at an interest rate of 4.5%. They decide to opt for an interest-only rate to keep their repayments lower and because they know that it’s only the interest repayments that are tax deductible for them. The cash flow implications for the property are outlined below:
Annual Rental Income: $20,800
Interest Repayments: $13,500
Net Cash Flow: $7,300
Taxable Income: $7,300
Tax Payable: $2,372.50
Net Income: $4,927.50
As is illustrated from the figures above, Tom and Susan would have to pay tax of $2,372.50 in their first year of becoming property investors at the tax rate of 32.5%.
Tom and Susan instead explore the idea of investing just $90,000 of their existing cash, with the view that they can explore other investment options with the remaining balance and agree to borrow the remaining $510,000 from the bank. Below are the cash flow figures based on this scenario.
Annual Rental Income: $20,800
Interest Repayments: $22,950
Net Cash Flow: -$2,150
Taxable Income: $0
Tax Payable: $0
Net Income: -$2,150
As is shown under this scenario, Tom and Susan would need to pay approximately $41 each week to cover the costs of owning the property, but they would not pay any tax and this $41 paid each week would accumulate for them as a tax credit.
Which is the right solution for you..?
As an Australian expat living and working abroad, you should consider your overall financial goals and then explore with a professional adviser how your financing strategy aligns to these goals.
Ensure that you seek professional advice to make the most of your time abroad and achieve your financial goals in a tax-efficient manner.
To your financial success!
Jarrad Brown is an Australian-trained and qualified Fee-Based Financial Planner with Australian Expatriate Group of Global Financial Consultants Pte Ltd providing specialist financial advice and portfolio management services to Australian professionals in Singapore. Jarrad Brown is an Authorised Representative of Global Financial Consultants Pte Ltd – No: 200305462G | MAS License No: FA100035-3
Australian Expatriate Group is a division of Global Financial Consultants in Singapore providing specialist advice to Australians living abroad.
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General Information Only: The information on this site is of a general nature only. It does not take into account your individual financial situation, objectives or needs. You should consider your own financial position and requirements before making a decision.
*Please note that Jarrad Brown is not a tax agent or accountant and none of the content outlined here should be taken as personal advice. You should consult your tax agent and financial adviser to review your current personal finances and financial goals to consider whether this strategy is appropriate for you.