Negative vs. Positive Gearing: An Overview

Negative and positive gearing is a strategy used by investors to make money on certain investments. This article discusses whether this strategy is better than just investing in the company or whether it's a losing investment.

What is Negative vs. Positive Gearing?

Negative gearing is when a property is owned and used as a personal residence, but the primary purpose of the property is to generate income. This type of gearing is permitted if the total rent paid on the property does not exceed 30% of the property's gross income.

Positive gearing is when a property is used for rental purposes, but the primary purpose of the property is to generate income. This type of gearing is allowed if the total rent paid on the property exceeds 30% of the property's gross income.

Which is Better for the Business?

Positive gearing is when a business borrows money to purchase assets, such as factories or land, with the intention of selling those assets at a higher value in the future. Negative gearing is when a business sells assets for less than its worth, which reduces its taxable income. 

Many experts argue that positive gearing should be abolished because it leads to inflated housing prices and other forms of asset speculation. Others argue that negative gearing should be abolished because it allows people who are struggling to keep up with their mortgage payments to avoid paying taxes on their income.

Ultimately, it is up to each individual taxpayer to decide whether they believe positive or negative gearing is best for them and their business.