Negative gearing Jake while talking to a friend (Max) at a party is informed about a topic called “negative gearing”. Tax advantages were discussed so Jake is seeking your advice. He was also told...

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Negative gearing Jake while talking to a friend (Max) at a party is informed about a topic called “negative gearing”. Tax advantages were discussed so Jake is seeking your advice. He was also told about potential changes should there be a change in Government. In your own words, explain “negative gearing” to Jake and the potential changes that may occur. In your own words, students should discuss the potential tax benefits for someone earning $100 k per year. The interest and other running costs are sufficiently connected to assessable income (rent) and therefore fully deductible under s 8-1 of ITAA 1997. Negative gearing is only profitable, if the net loss incurred by the tax payer over the length of the ownership of the property is exceeded by after tax capital gain on selling the property or the taxpayer were to recoup the loss in consecutive year from net rental incomes ( Sadiq K et al. 2017, p.427) For example, assume Jake bought a rental property at 300,000 by borrowing the money from bank at 7% interest rate. If interest expenses and other deductible running expenses amounts to 25000 and Jake only received rental (including outgoings recovered ) income of 20000, his net loss form rental property would be 5000. This will reduce his assessable income by 5000. Assuming his taxable income is 100,000 before this reduction, tax effect of this would be (5000 x 0.37= 1850). Meaning he would have to pay 1850 less in tax, which would bring down his net loss to (5000-1850) $3150. Important things to notice here is that there would still be a loss to bear by taxpayer. For high income earner, paying top marginal tax, negative gearing nearly cut their losses by half. However, because of this and until recently rapidly growing house prices, there were debates whether to pass legislation to specially curve negative gearing. Broadly speaking, Labor government is likely to pass legislation to curve or limit negative gearing, where Coalition (Liberal) government is less likely to do it, unless there is pressure from electorates. Given the downward trend in property markets in recent months, it is unlikely that any changes would be made anytime soon. 300 words