Negative gearing is one of Australia's most used tax strategies — and one of the most audited. The ATO has flagged rental deduction claims as a compliance priority, and their data-matching capabilities now extend to property managers, financial institutions, and state revenue offices. For bookkeepers managing property investor clients, getting the records right isn't optional.
This guide covers what negative gearing actually means for bookkeeping purposes, how to code rental income and expenses correctly, and the single most common mistake that turns a legitimate deduction into an ATO problem.
What Negative Gearing Means in Practice
A property is negatively geared when the deductible expenses associated with holding it exceed the rental income it generates. The resulting loss is (in most cases) deductible against the investor's other income — wage income, business income, dividends — reducing their overall taxable income.
For bookkeeping, this means tracking two categories:
- Rental income: Total rent received, including any bond money applied to arrears, insurance reimbursements, and any rental assistance payments
- Deductible expenses: A defined list of expenses that can be claimed against that income
The net loss (or profit) from the property flows into the investor's tax return. If you are maintaining the investor's personal or business accounts, the property should sit in its own subsidiary ledger or as a distinct entity in your chart of accounts.
Deductible vs Non-Deductible Expenses
The ATO has a specific list of deductible expenses for rental properties. Getting this right matters because overclaiming non-deductible expenses is one of the most common ATO audit triggers.
Deductible expenses include:
- Loan interest (on the portion used to fund the investment property, not private use)
- Property management fees
- Rates and land tax
- Insurance (landlord insurance, building insurance)
- Repairs and maintenance (see below — this is the trap)
- Depreciation on plant and equipment (via a tax depreciation schedule)
- Advertising for tenants
- Body corporate fees (strata levies)
- Accounting and bookkeeping fees attributable to the property
- Pest inspection and cleaning between tenancies
Non-deductible expenses include:
- Purchase costs (stamp duty, legal fees on acquisition — these form part of the cost base for CGT)
- Capital improvements (see below)
- Personal use costs if the property is partly personal
- Loan principal repayments (not interest — just the principal component)
The Repairs Trap: Capital vs Revenue
This is the single most audited area in rental property deductions, and the distinction is genuinely nuanced.
Repairs and maintenance (immediately deductible): Work that restores something to its original condition without improving or extending its useful life. Repainting walls that were painted before. Fixing a broken fence. Replacing a damaged tap. Clearing blocked drains.
Capital improvements (not immediately deductible): Work that improves the property beyond its original condition, extends its useful life, or adds something new. Replacing a lino floor with tiles. Adding a dishwasher where there was none. Converting a garage into a living space. Installing a new heating system in a property that had only gas heaters.
The bookkeeping question is: how do you code the expense when a tradesperson sends an invoice that doesn't specify whether the work was a repair or improvement?
The answer is: you ask. Get a description of what was done. "Replaced old deteriorated kitchen cabinetry with new cabinets of equivalent quality" is a repair. "Installed new stone benchtops in place of laminate" is an improvement.
If an expense is a capital improvement, it is not immediately deductible — but it is depreciable as a capital work (Division 43 building allowance at 2.5% per year) and forms part of the property's cost base for CGT purposes. Code it to a capital improvement account and flag it for the depreciation schedule.
Initial repairs: A specific trap. If a client buys a property that is in disrepair and undertakes repairs shortly after purchase, those repairs are generally treated as capital — because the property was purchased in that condition and the repairs bring it to a rentable standard, rather than restoring it from a previously rentable state.
Loan Interest and Split Loans
Loan interest is generally the largest deduction for negatively geared investors — and it is often incorrectly claimed when the loan has multiple purposes.
If a client took out a $600,000 investment loan and then redrew $80,000 for personal expenses (a holiday, a car), the interest on that $80,000 redraw is no longer deductible — it's personal. The deductible interest is calculated on the investment portion only.
When loans are mixed-purpose, the bookkeeping requires careful tracking of the original investment draw-down and any subsequent redraws. This is an area where clients frequently don't understand the issue — the bank just shows one loan and one interest charge. You may need to ask for the loan transaction history to identify any personal redraws.
Depreciation Schedules
Depreciation is a non-cash deduction that significantly affects the net rental outcome. Two types apply to investment properties:
Division 43 (building allowance): Claimed on the construction cost of the building at 2.5% per year. Only available for buildings constructed after September 1987 (with some exceptions). Requires a quantity surveyor's report to establish the deductible amount.
Division 40 (plant and equipment): Claimed on depreciable assets within the property — carpet, hot water systems, blinds, dishwashers, etc. Since 2017, second-hand properties purchased after 9 May 2017 can only claim Division 40 depreciation on new assets added after purchase.
Depreciation is claimed in the tax return (not through the books) but the bookkeeper needs to know it exists and ensure the client has obtained or is planning to obtain a depreciation report.
A Simple Year-End Checklist
- Confirm total rent received (reconcile with bank deposits and property manager statements)
- Confirm all loan interest — verify which portions are investment vs personal
- Categorise all expenses as deductible repairs vs capital improvements
- Confirm insurance paid for the year
- Confirm property management fees (usually on the annual statement)
- Flag any new capital improvements for depreciation schedule update
- Check for any partial year of ownership (if property was purchased or sold during the year)
Clean records mean a fast and accurate tax return — and a client who is confident they're claiming everything they're entitled to, without the risk of an ATO adjustment.