Lisa owns a negatively geared investment property with annual rental income of $25,000 and total deductible expenses of $35,000. If her marginal tax rate is 37%, what is her annual tax saving from negative gearing?

Q: What is the correct answer to: Lisa owns a negatively geared investment property with annual rental income of $25,000 and total deductible expenses of $35,000. If her marginal tax rate is 37%, what is her annual tax saving from negative gearing?

The correct answer is $3,700. Option A correctly applies the negative gearing tax calculation formula. Lisa's annual loss is $10,000 ($35,000 expenses minus $25,000 income). Under Australian taxation law, this loss can be offset against other taxable income. At her 37% marginal tax rate, the tax saving is calculated as: $10,000 × 37% = $3,700. This represents the actual reduction in her tax liability or increase in her tax refund due to the deductible property loss.

Q: What background knowledge is needed for this Finance Taxation question?

Negative gearing is an Australian tax strategy where property investment expenses exceed rental income, creating a deductible loss. Under the Income Tax Assessment Act 1997, investors can offset this loss against other taxable income, reducing overall tax liability. The marginal tax rate is the percentage of tax paid on the last dollar of income, which determines the actual tax saving from deductions. Deductible property expenses include interest, maintenance, insurance, rates, and depreciation. The Australian Taxation Office requires proper documentation of all expenses and income. This strategy is particularly relevant in Australia's property market where capital growth expectations often justify short-term negative cash flow.

Q: What is a good way to remember the answer to this Finance Taxation question?

Remember LOSS: Loss × Official rate = Savings. Think of it as 'What you LOSE, the tax office helps with at your rate.' The tax saving is always the loss amount multiplied by your marginal tax rate - never the gross income or gross expenses. When you see negative gearing questions, immediately identify the loss (expenses minus income), then multiply by the marginal tax rate. Ignore any options that use gross figures without calculating the net loss first.

Q: What exam tip applies to this Finance Taxation question?

Always calculate the net loss first (expenses minus income), then multiply by the marginal tax rate. Avoid options using gross income or gross expenses without considering the net position.

Q: How does this Finance Taxation concept apply in Australian real estate practice?

Sarah, a real estate agent, advises client Mark who's considering an investment property. The property generates $30,000 annual rent but costs $42,000 in expenses (loan interest, rates, maintenance). Mark's in the 32.5% tax bracket. Sarah calculates his $12,000 loss will save him $3,900 in tax ($12,000 × 32.5%), improving his cash flow position. She explains this immediate tax benefit helps offset the negative cash flow while he waits for capital growth, making the investment more viable despite short-term losses.

Question

Finance TaxationNegative GearingMEDIUM

Lisa owns a negatively geared investment property with annual rental income of $25,000 and total deductible expenses of $35,000. If her marginal tax rate is 37%, what is her annual tax saving from negative gearing?

Answer Options

A

$3,700

B

$9,250

C

$10,000

D

$12,950