Financial Glossary: Positive and Negative Gearing

Written By: Alice Robinson

Have you ever noticed that financial advisers tend to use a lot of terms that will often go right over your head and you just accept them because you trust your adviser knows what they are talking about? We believe it is important that you understand the finance terms that you may be hearing. For this reason, we are starting a new series called ‘Financial Glossary’ where we will define and explain some of the key words that you are likely to stumble across at some point in your financial journey. The first phrases that we will share with you are ‘positive gearing’ and ‘negative gearing’.

Context

Gearing is a term that is used by financial advisers when they are referring to investments, whether that be property or other securities. It talks  about the general relationship between the income and the debt relating to a particular investment.

Definition

Positive Gearing: Where the income from your investment is higher than the interest and other expenses you are paying in relation to that investment.

Negative Gearing: Where the income from your investment is lower than the interest and other expenses you are paying in relation to that investment.

Comparison

Positive gearing is the more commonly preferred pathway because it means that over your holding period, you will be earning a consistent income from that investment as opposed to suffering a loss as you would with negative gearing. The issue with this is that these earnings are a taxable form of income. Positive gearing is great if you need the extra income and the tax doesn’t bother you so much. Negative gearing is typically used by those relying on the capital gain at the end of the holding period to offset the incurred losses and those who also aim to reduce income tax. Keep in mind, you will only avoid the income tax on that negatively geared investment if you are in fact reducing your taxable income; be aware of this. A negatively geared investment will not necessarily always reduce your income tax.

So that is positive and negative gearing. Which option would you prefer?

If you are unsure which method is more suitable for you or you simply have some questions that you would like answered, visit the “Enquire & Book” page to book a consultation or call us on 3812 1420.


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