Positive Gearing vs Negative Gearing: How to Calculate Your Property Cash Flow in Australia
Most Australian investors use the terms "positive gearing" and "negative gearing" loosely — but the distinction matters enormously when you're trying to decide whether a specific property at a specific price actually works financially.
Here's how each approach works, what it costs (or saves) you in tax, and how to calculate whether a property you're considering is one or the other.
The Definitions, Simply Put
Positive gearing means your investment property generates more rental income than it costs to hold. After all deductible expenses — mortgage interest, property management, rates, insurance, repairs, and depreciation — you're left with taxable income. You pay tax on that profit, but you have positive cash flow.
Negative gearing means your holding costs exceed your rental income. You have a net rental loss. That loss is deductible against your other assessable income — your salary, business income, or other investment returns — which reduces your overall tax bill. But you're subsidising the property out of pocket every year.
Neutral gearing sits in the middle: income approximately equals expenses. This is relatively rare in practice, and it shifts over time as interest rates, rents, and deductible costs change.
How to Calculate Your Cash Flow Position
The key numbers you need:
- Gross annual rental income — weekly rent × 52
- Deductible holding costs:
- Mortgage interest (not principal repayments)
- Property management fees (typically 7%–10% of gross rent in NSW)
- Council rates and water charges
- Landlord insurance
- Maintenance and repairs
- Land tax (if applicable)
- Body corporate levies (for strata)
- Depreciation — non-cash deductions that reduce your taxable position without any actual cash outflow
The cash flow calculation (before tax):
Annual cash flow = Gross rent − (total cash expenses including principal repayments)
The tax calculation (after-tax position):
Taxable rental income = Gross rent − (deductible expenses including depreciation, but excluding principal repayments)
These two calculations produce different numbers because depreciation reduces your tax without costing you cash, while principal repayments cost you cash but are not deductible.
Worked Example: Negatively Geared Sydney Apartment
Purchase price: $800,000
Borrowing: $640,000 at 6.2% interest-only
Annual interest: $39,680
Gross rent: $36,400 ($700 per week)
Management fees (8%): $2,912
Council rates and water: $2,400
Insurance: $1,200
Depreciation (new build): $9,000
Land tax: $0 (below threshold)
Body corporate: $3,600
Taxable position: $36,400 − ($39,680 + $2,912 + $2,400 + $1,200 + $9,000 + $3,600) = −$22,392 net rental loss
At a 37% marginal tax rate, this $22,392 loss generates a tax refund of approximately $8,285.
Cash flow position (actual out-of-pocket):
$36,400 income − ($39,680 interest + $2,912 management + $2,400 rates + $1,200 insurance + $3,600 body corporate) = −$13,392 per year before tax benefit
After tax refund: −$13,392 + $8,285 = −$5,107 per year (approximately $98 per week out of pocket)
The depreciation ($9,000) created $3,330 of additional tax benefit without any cash outflow — significantly improving the after-tax position.
Rental Income Tax in Australia: How It Works
All rental income is assessable income in Australia. There is no blanket exemption or preferential rate for rental earnings — it's taxed at your marginal rate.
You are required to declare rental income in your annual tax return. The ATO expects full declaration of gross rent received, including partial-year rent, rent from short-term platforms, and any non-cash benefits from tenants.
Deductible expenses reduce your taxable rental income. Common deductions include:
- Loan interest (not principal)
- Property management fees
- Advertising for tenants
- Council rates, water charges
- Building insurance and landlord insurance
- Repairs and maintenance (not capital improvements)
- Accountant fees for preparing rental schedules
- Land tax
- Body corporate levies
- Depreciation (capital works and plant and equipment)
Capital improvements — such as a new kitchen, bathroom renovation, or adding a deck — are not immediately deductible. They are added to the property's cost base, reducing your CGT on eventual sale, and may also qualify for Division 43 depreciation over the building's remaining useful life if the improvement is structural.
Travel to inspect your investment property became non-deductible for residential investment properties from 1 July 2017. This catches some investors off guard.
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The Role of Depreciation in the Cash Flow Calculation
Depreciation is the most misunderstood element of investment property tax.
Division 43 (Capital Works): For properties constructed after 15 September 1987, you can claim 2.5% of the original construction cost as a deduction each year for up to 40 years. For a new apartment with a construction cost of $360,000, that's $9,000 per year — a deduction that requires no cash outflow but meaningfully reduces your taxable income.
Division 40 (Plant and Equipment): Fixtures and fittings — carpets, blinds, appliances, air conditioning — depreciate separately at their effective life rates. However, from 2017, second-hand plant and equipment in residential properties can no longer be depreciated by a new owner (they're already depreciated down). This deduction is now primarily available on new properties or for items you personally install.
A quantity surveyor report (typically $600–$900) is the standard method for establishing the depreciation schedule for a new investment property. The report is itself tax-deductible and can be commissioned immediately after settlement.
Which Strategy Suits NSW Investors?
In the NSW market, genuinely positive gearing at Sydney property prices is difficult to achieve with standard financing. Gross rental yields on many middle-ring apartments sit at 4%–5.1%, while borrowing costs have remained above 6%. Without substantial deposits (60%+ LVR), most Sydney properties are structurally negatively geared.
Positive gearing is more achievable in:
- Regional NSW markets with lower entry prices and higher yields (Newcastle, Central Coast)
- Properties with dual-income potential (granny flat or dual occupancy)
- Situations with large deposits that significantly reduce interest costs
- Properties with above-average depreciation deductions that improve the after-tax cash flow position
The strategic question isn't "which is better" in the abstract — it's whether the negatively geared position is sustainable for your financial situation over the holding period, and whether the expected capital growth justifies the annual shortfall.
Negative gearing banking on capital growth is a long-term bet. The 50% CGT discount rewards investors who hold for more than 12 months, but the discount only materialises when you sell. Until then, you're funding the shortfall.
The New South Wales Investment Property Guide includes a cash flow worksheet that models the full after-tax position — gross rent, deductible expenses, depreciation estimates, land tax, and the expected after-tax contribution required — so you can assess whether a specific property at a specific price is financially viable for your situation before you commit.
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