Do Tax Deductions such as Negative Gearing need to coincide with Tax Brackets? ATTEMPT AT MAKING THE QUESTION AS SIMPLE AS POSSIBLE: Fred earns $60,000 a year and has a few investment properties which costs him $30,000 out of pocket annually after all income and expenses have been taken into account. Due to negative gearing this means he can deduct this amount from his taxable income - How much money would Fred get back? MY QUESTION IN MORE DETAIL: Fred works full time earning an annual gross income of $60,000 a year, plus super. According to current ATO tax brackets this means he would be paying: $4,350 plus 30c for each $1 over $35,000. ($25,000 @ 30% = $7,500) So $11,850 tax in total. Fred also owns 3 investment properties which earn him a gross annual income of $70,000. Outgoings and Loan Interest on the IP's costs Fred $100,000 annually. This leaves Fred $30,000 in the red and because of Negative Gearing allows Fred to claim this amount as a Tax Deduction. Now provided the information above is correct up until now, how much would Fred be able to claim back exactly? $8,250? a) Does the IP income get cancelled out by the IP costs and not get taken into consideration at all, leaving his taxable income at $60,000 with a $30,000 tax deduction. So Fred would only be able to claim 30% of $25,000 (because that's all he paid 30% on) and then 15% of the remaining $5,000? ($7,500 + $750 = $8,250) OR b) Would Freds rental income be added to his working income ($60,000 + $70,000) giving him a total taxable income of $130,000 and put him into the 38% tax bracket, then allowing him to claim back 38% of $30,000. EDIT: Just noticed this method might be exactly the same as a) if you take the gross income of $130,000 and offset it against the expenses you're left with a $30,000 taxable income. Which would be the same as claiming $30,000 worth of Tax Deductions on a $60,000 income. I guess it's just a matter of when/how the deductions are calculated. My assumption is they would probably be done on your taxable income AFTER it has been offset against all your deductions, not before? i.e In the scenario above Fred had $130,000 income with $100,00 worth of deductible expenses leaving him with a $30,000 taxable income, however because his job does PAYG he paid tax on $60,000 income, of which he can now make $30,000 worth of deductions, essentially what I said in a) ? _____________________________ I ask because I'm considering buying 2 more IP's and Negative Gearing a fair bit while I'm still young and living at home, but it looks like there would be quite a lot I'd be claiming back and if it turns out I can only claim my tax bracketed amount it probably wouldn't be worth gearing so much if I could only claim back 15% on some of the expenses and might be better for me to just buy 1 more IP instead of 2. This isn't some sort of HW question or anything and yes I know I should speak to an accountant before making any final decisions, but getting an idea on how this works would then let me know whether to take things further with an accountant or not. Like I said, if scenario a) is the answer, it probably wouldn't be worth my while.

Spoke with my accountant friend and he explained to me it's based on my marginal tax bracket. i.e. In the example above where Fred has paid tax on $60,000 and can make $30,000 worth of deductions he could only claim 30% on $25,000 and 15% on the remaining $5,000 because that's how much tax he paid. Meaning he would get a tax refund of $8,250. He also said that both scenarios a) and b) I specified above can be applied as they both essentially end up with the exact same solution. i.e. Adding up all your income and minusing all your deductable expenses to get your taxable income using the examples above leaves you with a $30k taxable income, whilst simply minusing the remaining deductable expenses from your working income would also leave you with a taxable income of $30,000. I believe scenario b) is the proper way to do it though. Thanks anyway guys, if someone could clarify this I'd appreciate it. Otherwise I'll leave the thread here in case anyone else is ever interested.

s.4-15 ITAA97 Add up all your assessable income Subtract all your allowable deductions Equals taxable income There is nothing there that says you have to segregate and treat items in any particular order, just agregate. Cheers, Rob

So in the example above I'd be correct in saying Fred gets $60,000 from working and $70,000 from rental income. So his assessable income is $130,000. His allowable deductions equate to $100,000. Therefore his taxabe income is $30,000. Thanks for the clarification Rob, appreciate it. Would you possibly be able to clarify for me that in the event where Fred would have paid normal tax on his $60,000 work income totalling $8,250, that his deductions would work as follows: (25,000*0.3)+(5,000*0.15) Because only $25,000 of his income was taxed at 30% therefore he can only claim 30% back on that amount.

The 30% threshold is $37,000. You will also need to consider tax offsets such as the LITO. Additionally, investement losses will be counted as ATI for eligibility of other offsets and assistance. Really, a marginal analysis should compare with the next best scenario such as a margin loan or investment in a business. You are just assuming he does nothing else except take his salary and spends it, leaving any equity and leverage potential unproductive. Cheers, Rob

You're right, I just noticed I was looking at the old brackets. So that means Fred would only be able to claim $23,000 @ 30% huh? What is/How does the Low Income Tax Offset work? I tried googling and found this on Wikipedia: "The Low Income Tax Offset (LITO) is a tax rebate for individuals on lower incomes. From 1 July 2010 it provides individuals earning less than $30,000 with a tax rebate of $1,500. The full offset is reduced by 4c for every dollar of taxable income above $30,000, meaning incomes greater than $63 750 do not receive any benefit.[4] The LITO creates an effective tax-free threshold of $16,000 for low income earners. Half of the LITO entitlement is received as reduced withholding tax, the balance is received when a tax return is lodged." I also found a calc on the ATO website which basically said if your taxable income was $60,000 a year you would be entitled to $150 rebate. But in Freds case above, would his taxable income be $130,000, $60,000 or $30,000? (I'm thinking the latter because you do income-expenses to get your taxable income) Sorry dude, I know what you're saying is probably something that would help me a lot, could you perhaps explain it a little more?

i would work it out like this: Income is $60,000 from this you minus any loss from rental properties which gives you his new taxable income. New taxable income is $30,000, tax payble on the $30,000 is $XX tax refund = tax already paid - $XX. Note, the new taxable income may be even lower and $XX will vary depending on what else he can claim in relation to his work, and any medicare levy and low income tax rebates etc. Tax rebates are like a credit for tax to be paid.

Thanks Terry, I'm thinking for the scenario above it would go like this: All Freds income $60,000 + $70,000 = $130,000 Minus all Freds deductable expenses = $100,000 Leaving Fred a taxable income of $30,000. Fred would then get $X back because he'd have paid tax on $60,000 from working. However, and here's what I'm not too sure on and would like to know a little more about; The LITO, which I just found out about it now that Rob mentioned it. Would this then apply to the remaining $30,000 taxable income? Meaning Fred would get a further $1,350 refunded? I used this calculator to get that number. I hope this is the case, if it is, then I think I understand everything in my head. The only thing remaining that I'm a little unsure about and would most definitely want to know a little more about since Rob mentioned it, is this:

S That calculator doesn't appear to be for this financial year. Try this one, TaxCalc - Calculate your tax cut. 2011-2012 financial year which is very easy to use and includes the rebate. If his wage was $60,000 then he would have paid about $12,200 in tax installments. If he final total income is just $30,000, the tax payable on this is just $2,550. Therefore the tax refund would be tax paid already less tax he should pay. $12,200 - $2,550 = $9,650

Excellent calc terry, big thanks! Essentially it looks as if what I said above would be correct, excellent! And that calc makes working everything out that little bit easier, cheers man!! Which just leaves me keen to learn a little more about what Rob said above.