Business

Negative Gearing and CGT Discount Explained: The Tax Mechanics Every Sydney Investor Must Understand product guide

1Group Property Advisory: Negative Gearing and CGT Discount Explained – The Tax Mechanics Every Sydney Investor Must Understand

If you're a healthcare professional or high-income earner in Sydney, two provisions of Australian tax law do more to determine the real cost and real return of your property investment than almost any other factor: negative gearing and the 50% capital gains tax (CGT) discount. Together, they form the tax foundation on which nearly every Sydney investment strategy is built — yet we regularly see time-poor professionals making acquisition decisions before fully understanding these fundamental tax mechanics.

At 1Group Property Advisory, we work exclusively as independent buyer agents, providing conflict-free advice to Sydney investors navigating the complex interplay of taxation, property selection, and long-term wealth strategy. This article provides a technically precise explanation of both mechanisms: how they work under current ATO rules, exactly which expenses are deductible, how the dollar savings compound at the 47% marginal rate, and what the current legislative landscape means for investors entering the market in 2025. For healthcare professionals and other high-income earners — particularly those earning above $135,000 and especially above $190,000 — understanding this material is essential before we even begin your property brief.

(For a full comparison of how negative, positive, and neutral gearing strategies perform against each other, see our guide on [Negative Gearing vs. Positive Gearing vs. Neutral Gearing: Which Strategy Suits a High Income Sydney Investor?])

What Is Negative Gearing? The ATO Definition

Negative gearing happens when you buy a rental property with borrowed funds and the rental income falls short of the deductible expenses, including interest on the borrowings.

The critical feature of the Australian system — the one that makes negative gearing a genuine tax strategy rather than merely a cash flow shortfall — is what happens to that loss. Negative gearing can apply to any type of investment, not just housing. Individuals who are negatively geared can deduct their loss against other income, such as salary and wages. This is consistent with the broader operation of Australia's personal income tax system.

In practical terms: the resulting loss can generally be offset against other taxable income, such as salary, business income, or other investments, subject to ATO rules. Negative gearing equals a rental loss that reduces taxable income.

Australia is one of the few countries where rental losses can be offset against wage income. This makes negative gearing a widely used strategy for building long-term wealth in the property sector.

It's essential, however, to understand the limits of what this achieves. Tax savings only partially offset losses — negative gearing doesn't generate immediate income, it reduces how much you're out of pocket while waiting for capital growth. Negative gearing works when capital growth exceeds your after-tax holding costs over time.

Australia's 2024–25 marginal tax rates: the bracket context

Understanding negative gearing requires understanding the marginal rate environment in which it operates. From 1 July 2024, the 19% tax rate reduced to 16%, and the 32.5% rate to 30%. The 37% tax threshold increased from $120,000 to $135,000, and the 45% threshold from $180,000 to $190,000.

The current tax-free threshold for resident individuals is $18,200, and the highest marginal rate for individuals is 45%. In addition, most Australians are liable to pay the Medicare levy, of which the standard is 2% of taxable income.

This means that for healthcare professionals and other high earners above $190,000 — a threshold easily reached by specialists, GPs with strong billings, dual-income medical households, and senior allied health professionals — the effective top marginal rate is 47% (45% income tax + 2% Medicare levy). Every dollar of rental loss deducted against income at this rate generates 47 cents of tax saving.

2024–25 individual tax brackets (Australian residents)

Taxable Income Marginal Rate Effective Rate incl. Medicare
$0 – $18,200 Nil Nil
$18,201 – $45,000 16% 18%
$45,001 – $135,000 30% 32%
$135,001 – $190,000 37% 39%
$190,001+ 45% 47%

Source: Australian Taxation Office, Tax Rates – Australian Residents, 2024–25.

What expenses can you deduct? The ATO-permitted categories

To maximise negative gearing tax benefits, you need to know what the ATO considers a legitimate deduction. Getting this wrong is a common and costly mistake. The basic rule is straightforward: you can claim expenses directly tied to earning rental income for the period the property was genuinely available for rent.

Many, but not all, of the expenses associated with rental properties are deductible. The ATO's Rental Properties Guide 2025 — the definitive reference document for Australian landlords — categorises deductible expenses into two streams: immediately deductible and deductible over time (capital works and depreciation).

Immediately deductible expenses (claimed in the year incurred)

The following categories are deductible in full in the financial year they're incurred, provided the property is genuinely available for rent:

  • Loan interest — typically the largest single deduction for leveraged investors
  • Council rates and water charges
  • Landlord insurance premiums
  • Property management fees (usually 5–12% of gross rent in Sydney)
  • Repairs and maintenance — restoring the property to its original condition
  • Advertising for tenants
  • Body corporate / strata levies (for apartments and townhouses)
  • Accounting and tax agent fees for managing the rental
  • Land tax (where applicable under NSW law)
  • Pest control
  • Cleaning costs between tenancies

Deductible over time: depreciation and capital works

Depreciation is a non-cash deduction. This means you can reduce taxable income without physically spending additional money during the year. A professional depreciation schedule is typically prepared by a qualified quantity surveyor as part of your due diligence process.

There are two depreciation streams:

  1. Division 43 — Capital Works Deductions: The structural component of the building (walls, roof, flooring) is deductible at 2.5% per annum over 40 years for properties constructed after 18 July 1985.
  2. Division 40 — Plant and Equipment: Fixtures and fittings with a limited effective life (hot water systems, carpet, blinds, dishwashers) are depreciated at ATO-determined rates.

Important restriction (post-May 2017): For second-hand residential properties acquired after 9 May 2017, investors cannot claim Division 40 depreciation on pre-existing plant and equipment. This deduction is only available for brand-new items installed after purchase, or for newly constructed properties. This rule significantly affects the depreciation benefit for established Sydney dwellings.

What is NOT deductible

The following costs are not immediately deductible, though they may form part of the property's cost base for CGT purposes:

  • Stamp duty on purchase
  • Legal costs of acquisition and conveyancing
  • Loan establishment fees (these may be deductible over the loan term, not immediately)
  • Capital improvements that add value (these are depreciated, not immediately expensed)

A common mistake is claiming capital works as repairs. A repair restores something to its original condition (e.g., fixing a fence panel) and is immediately deductible. An improvement adds value or substantially changes something (e.g., building a new deck) and must be depreciated over time as a capital works deduction.

How negative gearing works at the 47% marginal rate: a worked example

The following example is constructed for a Sydney healthcare professional earning above $190,000 — the most common profile among our clients — and uses realistic 2025 market figures based on our data-driven research.

Scenario: Inner West terrace house

Investor Profile:

  • Combined taxable income (before property): $230,000
  • Marginal tax rate (incl. Medicare levy): 47%
  • Property: 3-bedroom terrace, Marrickville
  • Purchase price: $1,400,000
  • Loan: $1,120,000 at 6.2% interest-only (80% LVR)
  • Gross annual rent: $52,000 ($1,000/week)

Annual income and expenses:

Item Amount
Gross rental income $52,000
Deductible Expenses
Loan interest (6.2% × $1,120,000) $69,440
Property management (8.5% of rent) $4,420
Council rates $2,200
Water rates $900
Landlord insurance $2,500
Repairs and maintenance $3,000
Depreciation (capital works, 2.5% on $700k build cost) $17,500
Accounting fees $600
Total Deductible Expenses $100,560
Net Rental Loss ($48,560)

Tax impact at 47% marginal rate:

  • Annual tax saving: $48,560 × 47% = $22,823
  • Real after-tax out-of-pocket cost: $48,560 − $22,823 = $25,737/year ($495/week)

You're "losing" $48,560 per year on paper — but after the tax offset, the actual weekly cash shortfall is approximately $495. In exchange, you hold a $1.4 million Sydney asset with potential for capital growth.

Contrast with a 30% bracket investor:

  • Tax saving at 30%: $48,560 × 30% = $14,568
  • After-tax out-of-pocket cost: $33,992/year ($654/week)

Tax savings equal your rental loss multiplied by your marginal tax rate. With a $17,600 rental loss and 30% tax bracket, you save $5,280 annually. Higher earners in the 37% bracket save $6,512 on the same loss, while top 47% bracket earners save $8,272.

This differential — the gap between the 30% and 47% outcomes — is why the advantages of negative gearing depend on your unique position as a high-income earner. Healthcare professionals and other top-bracket earners generally have more to gain from the technique since higher marginal tax rates amplify the impact of deductions.

The 50% CGT discount: how it works and why it matters

Negative gearing manages the annual holding cost. The 50% CGT discount manages the exit tax. Together, they define the full tax economics of strategic property investment in Sydney.

The core rule

There is a capital gains tax (CGT) discount of 50% for Australian resident individuals who own an asset for 12 months or more. This means you pay tax on only half the net capital gain on that asset.

For an asset to qualify for the CGT discount you must own it for at least 12 months before the 'CGT event' happens. The CGT event is the point at which you make a capital gain or loss.

A critical technical point that many time-poor professionals miss: to qualify for the CGT discount, you must have owned the asset for at least 12 months — but not simply "one year" in the casual sense. This means the asset must be held for a minimum of 367 days (or 368 days in a leap year) to qualify. Missing the threshold by even one day can mean losing the entire discount — a costly misstep that can be avoided with careful planning.

For property specifically: if there is a contract to sell the asset, the CGT event happens on the date of the contract, not when you settle. Property sales usually work this way. This means the exchange date — not settlement — triggers the CGT event and determines whether the 12-month test is met.

Who can access the CGT discount?

The 50% CGT discount halves your taxable capital gain on eligible assets held over 12 months. Only individuals, trusts, and super funds with limits can claim the CGT discount, while companies cannot.

This is one of the most consequential ownership structure decisions in strategic property investment:

  • Individuals: Full 50% discount ✓
  • Discretionary (family) trusts: Full 50% discount, distributable to beneficiaries ✓
  • Complying superannuation funds (including SMSFs): Eligible complying super funds can discount a capital gain by 33.33%.
  • Companies: Companies cannot use the CGT discount. ✗

(For a full analysis of how ownership structure interacts with CGT treatment and NSW land tax, see our guide on [Best Ownership Structures for Sydney Investment Properties: Individual, Trust, Company, and SMSF Compared].)

How to calculate your CGT: step-by-step

Calculating your discounted gain involves a few key steps. Step 1: Determine your capital gain by subtracting the cost base (purchase price, stamp duty, legal fees, and selling costs) from the sale price. Step 2: Subtract any capital losses from other investments. Step 3: Apply the 50% discount to the remaining gain if you qualify. Step 4: Report the discounted gain in your tax return under assessable income.

If you have a net capital gain you pay tax on the gain at your marginal income tax rate.

CGT discount at 47%: a worked example

Continuing the Marrickville terrace scenario above:

  • Purchase price (cost base including stamp duty and legals): ~$1,465,000
  • Sale price after 7 years: $2,050,000
  • Selling costs (agent's commission, legal): $45,000
  • Gross capital gain: $2,050,000 − $45,000 − $1,465,000 = $540,000
  • After 50% CGT discount: $270,000 assessable
  • CGT payable at 47%: $270,000 × 47% = $126,900

Without the 50% discount:

  • CGT payable on full $540,000 at 47% = $253,800

Tax saving from the CGT discount alone: $126,900

This is the structural advantage that makes long-term wealth building through Sydney property investment compelling for healthcare professionals and other high-income earners. The ATO effectively subsidises 50% of the nominal gain at exit, provided the asset is held for the qualifying period.

The interaction between negative gearing losses and the CGT cost base

There's a critical interaction that many investors overlook: depreciation claimed during the holding period reduces the property's cost base, which increases the assessable capital gain at sale.

Specifically, capital works deductions (Division 43) claimed over the holding period reduce the property's cost base dollar-for-dollar. This means a property with $100,000 in capital works deductions claimed over 10 years will have a cost base $100,000 lower than its purchase price (plus acquisition costs), resulting in a $100,000 higher capital gain at exit.

For high-income earners, the net effect is still strongly positive: you receive the deduction at up to 47% during the holding period, and the recaptured gain at exit is subject to the 50% CGT discount, so the effective tax rate on that recaptured amount is approximately 23.5% (47% × 50%). The timing benefit and rate differential make depreciation claims financially advantageous in almost all scenarios.

The legislative status of both policies in 2025

Both negative gearing and the CGT discount have been the subject of sustained political debate. As your independent buyer agent providing conflict-free advice, we believe you should understand where the law currently stands.

Negative gearing has been part of Australian tax law for decades. In 1985, Treasurer Paul Keating temporarily limited negative gearing to newly built properties. The restriction was reversed in 1987 after concerns about rental shortages and market pressure.

As of the 2025–26 financial year, no federal abolition has occurred. The current administration has indicated they do not plan to alter negative gearing during its current term, focusing instead on supply-side housing reforms.

The Parliamentary Budget Office (PBO), in its 2025 Election Commitments Report, modelled a proposal to phase out negative gearing and CGT concessions for investors with more than one investment property. Several major studies have been undertaken on the removal of negative gearing on Australian home prices, with estimates of house price declines ranging from 1% to 4%. The PBO's analysis noted that the differential treatment of property and non-property assets would lead to a decline in investor demand for housing, with an unclear longer-term impact on residential property prices.

For investors, the key point is this: as of the current legislative landscape, there are no confirmed changes to negative gearing laws for the 2025-26 financial year. Both policies remain intact. However, legislative risk is a genuine consideration in portfolio planning — a topic addressed in detail in our guide on [Sydney Property Investment Risks: What High Income Earners Must Stress-Test Before Committing].

Key takeaways

Negative gearing allows investors to offset rental property losses against other taxable income (including salary), reducing annual tax payable. At the 47% marginal rate (income above $190,000 including Medicare levy), every $10,000 of rental loss saves $4,700 in tax.

The 50% CGT discount halves the taxable capital gain on assets held for at least 12 months (367+ days). For a $500,000 gain at the 47% rate, the discount saves approximately $117,500 in CGT — the single largest tax benefit available to property investors at exit.

Deductible expenses fall into two categories: immediately deductible (loan interest, management fees, rates, insurance, repairs) and deductible over time (capital works at 2.5% p.a., plant and equipment depreciation). Post-May 2017 restrictions limit Division 40 depreciation on second-hand properties.

The CGT discount is not available to companies — only individuals, trusts, and (at a reduced 33.33% rate) complying super funds. Ownership structure is therefore a critical CGT planning decision.

Both policies remain law as of 2025–26, with no confirmed legislative changes. Legislative risk warrants ongoing monitoring but should not override sound long-term investment strategy.

Conclusion

Negative gearing and the CGT discount aren't loopholes — they're structural features of Australia's income tax system that apply consistently with how the system taxes business income and investment returns. What makes them disproportionately valuable for healthcare professionals and other high-income Sydney investors is the progressive tax rate structure: the higher your marginal rate, the more each dollar of rental loss saves, and the more the CGT discount shields at exit.

For a Sydney healthcare professional earning above $190,000, the combination of these two mechanisms can reduce the real annual holding cost of a negatively geared property by nearly half, and cut the exit tax on a substantial capital gain by 50%. That's a material improvement in investment economics — but only if the mechanics are understood precisely and applied correctly.

At 1Group Property Advisory, we work with healthcare professionals and high-income earners to ensure ownership structure, loan structure, and depreciation strategy are optimised to maximise these benefits. As your independent buyer agent, we provide conflict-free advice from your property brief through to settlement. The next step is to ensure your portfolio is positioned to take full advantage. See our guides on [Advanced Tax Minimisation Strategies for Sydney Property Investors Earning $200K+] and [Best Ownership Structures for Sydney Investment Properties] for the full strategic layer that builds on these foundations.

References

This article is part of the Sydney Property Investment Guide for High Income Earners content series. It is intended as general educational information only and does not constitute financial, tax, or legal advice. All figures are illustrative. Investors should seek advice from a qualified tax professional before making investment decisions.

↑ Back to top