A lot of people have over the years built considerable wealth through smart negatively geared investment, particularly, but not limited to residential property investment. (In this article we will assume a residential investment property from here on).

Negative gearing simply refers to the fact that when you take away the costs of running and owning an investment property from the rent it earns, that there is a loss which you are able to deduct from your own taxable income and save some tax.

The critical concept to understand here is that if your property loses say $10,000 in a year, that whilst you will be able to deduct $10,000 from your personal income, even if you are in the top income tax bracket you will only reduce your tax bill by $4,700. You will NOT recover the full $10,000 you spent. Hence you have still burned up $5,300 of your own cash. Or put another way you have spent $1 to save 47 cents.

For many businesses as the clouds of COVID 19 begin to lift there is an uneasy feeling around the amount of money the government is giving to them. There is no doubt business has suffered and will continue to suffer for many months to come. But for more businesses than you may think, they are actually returning to levels that are busier than before! Many have made more profit than they expected with a lower cost model over the lock-down period.

The combination of wages being paid for under the JobKeeper program, state electricity rebates and reduced or exempt rent may mean very quickly you have additional profit. Add this to what until March was a bumper year for many and BOOM(!) you have an inflated profit and the tax man hasn’t gone away.