Negatively Geared Property - Income Splitting

For Australian couples with a significant gap between their salaries, how you "title" an investment property can be the difference between a modest tax return and a major annual windfall.

If you are looking at a property that will be negatively geared (where expenses like interest and maintenance exceed the rent), the standard 50/50 ownership split might actually be costing you money. Instead, an intermediate "income split" strategy could save you between $2,000 and $6,000 every year.

How Income Splitting Works

In Australia, the ATO requires that rental income and expenses be claimed in exact proportion to legal ownership. By intentionally setting up the ownership so the higher-income earner holds the larger share (e.g., 80/20 or 90/10), you "tilt" the tax benefits in your favour.

• Maximising Deductions: The person in the 45% tax bracket gets a much larger "discount" on every dollar of interest paid compared to someone in the 19% bracket.

• The "Paper" Loss: Because the higher earner owns 80% of the property, they claim 80% of the losses against their high salary, significantly lowering their taxable income.

Is This Strategy Right for You?

This approach is an intermediate strategy specifically designed for couples with disparate income levels. It is best suited for those who:

• Are purchasing a property they know will remain negatively geared for a significant period.

• Are in the "accumulation phase" of their investment journey.

• Have a clear understanding of their long-term career trajectories and income gaps.

To make this work, you must register the title as "Tenants in Common" rather than "Joint Tenants." This allows you to specify exact percentages (like 70/30) rather than the default 50/50.

Important Risks and Rules

While the tax savings are attractive, there are strict compliance rules and long-term financial consequences to consider:

• The CGT Trap: When you eventually sell the property for a profit, the Capital Gains Tax (CGT) is also split based on ownership. The higher earner will pay tax on the lion's share of the profit at their higher marginal rate, which could wipe out your yearly savings.

• Positive Gearing Shift: If the property becomes profitable (due to rent increases or falling interest rates), the higher earner is taxed on that profit at their top rate, making the strategy inefficient.

• ATO Part IVA: You cannot artificially divert income. The ownership split must be a genuine arrangement documented on the title, and your loan split must be proportional to your ownership.

• Relationship Risk: Unequal ownership can create complications in the event of a relationship breakdown, as the legal title dictates the starting point for asset division.

Did you find this useful?

• Yes
• No