Sarah owns an investment property that generates $25,000 annual rental income. Her annual expenses are $18,000 in interest, $3,000 in rates and maintenance, and $2,000 in management fees. What is her tax position?

Q: What is the correct answer to: Sarah owns an investment property that generates $25,000 annual rental income. Her annual expenses are $18,000 in interest, $3,000 in rates and maintenance, and $2,000 in management fees. What is her tax position?

The correct answer is Positive gearing with $2,000 profit. Option A is correct because Sarah's rental income ($25,000) exceeds her total deductible expenses ($23,000), creating a $2,000 profit. This represents positive gearing, where the property generates more income than expenses. Under Australian taxation law, this $2,000 profit is assessable income that must be declared on Sarah's tax return. The calculation is straightforward: $25,000 income minus $23,000 total expenses equals $2,000 positive cash flow, confirming positive gearing status.

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

Property gearing in Australia refers to the relationship between rental income and deductible property expenses. Positive gearing occurs when rental income exceeds expenses, creating taxable profit. Negative gearing occurs when expenses exceed income, creating tax-deductible losses. Deductible expenses typically include loan interest, council rates, maintenance, management fees, insurance, and depreciation. Under Australian taxation law, rental income is assessable income, while legitimate property expenses are tax-deductible. This affects an investor's overall tax position and cash flow. Understanding gearing is essential for property investment analysis and tax planning strategies.

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

P-R-O-F-I-T: Plus (income) minus Rates, Operations, Fees, Interest, Tax-deductibles. If the result is positive, you have positive gearing and PROFIT to declare. If negative, you have negative gearing and can claim the loss. Think of it as 'Does my property make me PROFIT or give me a tax break?' When calculating gearing, list all income sources, subtract all deductible expenses using PROFIT, then determine if the result is positive (positive gearing) or negative (negative gearing). The sign of your final number tells you the gearing type.

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

Always add ALL deductible expenses before comparing to rental income. Don't just use interest - include rates, maintenance, management fees, and other costs. Income minus total expenses determines gearing type and tax position.

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

A property investor reviews their annual tax position before lodging their return. They collect rental statements showing $25,000 income, loan statements showing $18,000 interest, council rates of $3,000, maintenance receipts of $3,000, and property management fees of $2,000. Their accountant calculates the net position to determine whether they'll pay tax on profit or claim a deductible loss, affecting their overall tax strategy and cash flow planning for the following year.

Question

Finance TaxationNegative GearingMEDIUM

Sarah owns an investment property that generates $25,000 annual rental income. Her annual expenses are $18,000 in interest, $3,000 in rates and maintenance, and $2,000 in management fees. What is her tax position?

Answer Options

A

Positive gearing with $2,000 profit

B

Negative gearing with $2,000 loss

C

Break-even position

D

Positive gearing with $7,000 profit