Negative gearing

Negative gearing is the term given when interest paid on funds borrowed to finance the acquisition of an income-generating investment (eg a rental property, shares which generate dividends, or any other investment that generates assessable income) exceeds income received in the short-term, ie the investment produces a net tax loss for the year.

There is no limit on interest deductions allowed if the investment is a passive investment (eg property, financial instruments, shares etc) provided the borrowed funds were applied to the acquisition of the income-producing asset. Losses incurred on rental properties or other income-producing investments can be offset against other assessable income, thereby reducing the amount of tax payable (however non-commercial business losses may be deferred in some circumstances)

Example
In the 2021-22 income year, a taxpayer has a net salary (after tax deductions) f $50,000 and borrowed $102,000 at 10% interest pa to buy a rental property. Net rental received for the current year is $6,240 (ie. after deductible expenses other than interest)

Taxable salary $50,000.00
plus net rental receipts $6,240.00
Total assessable income $56,240.00
less interest deduction ($10,200.00)
Taxable income $46,040.00
Tax payable (excluding Medicare) $5,430

The tax payable (excluding Medicare) on the $50,000 net salary without the negatively geared rental property would otherwise be $6,717.