Is It Time For Negative Gearing To Be Scrapped?

April 16, 2015

 

There have been many different market commentators insisting that negative gearing tax benefits should be removed from property investments in order to slow the capital growth rate of property around Australia. The premise is that the negative gearing tax incentives for holding property in Australia has directly lead to the market becoming inflated and created a major rift between those who rent and those who are own. The benefits of negative gearing are significant for investors with respect to cash flow and could have a considerable effect on the market if removed. 

 

First we need to get a reasonable idea of how negative gearing operates. If an investor incurs a loss from an investment they are able to deduct that loss from their taxable income, hence reducing the amount of tax they pay. Depreciation of property is considered a loss and so investors are able to offset their income with this ‘paper’ loss. Depreciation is a capital loss, however and as such is then taken into consideration when calculating capital gains tax when an investor chooses to sell their investment. 

 

 

It can be argued that a strong driver of property prices is not that investors are able to offset these losses, but the fact that when calculating capital gains tax, the tax is only calculated on 50% of the capital gain (if held for over 12 months). This has lead to investment properties being the third most popular saving vehicle after the family home and superannuation. 

 

 

 

In a recent review of the Australian tax structure Tony Abbott said that negative gearing would not be removed and stated that “Australia does not have a problem with taxes being too low; Australia has a problem with spending being too high because of the excesses of the former government.”

 

In reality it would be almost impossible to pass a law removing negative gearing from the Australian tax system. In 1985 the Hawke government effectively abolished negative gearing for rental property investments. For two years after the announcement of the policy, expenses related to rental property investments could not be claimed against income from other sources such as wages. The decision was quickly reversed. A major reason for the policy reversal was political: property lobbyists threatened to campaign against the then NSW state government in a forthcoming election. The number of investors utilising the benefits of negative gearing is far to high for this benefit to be removed by any democratically nominated government. 

 

As per the graph below, almost 25% of tax filers in the upper tax brackets utilise negative gearing. Also the highest number of people using negative gearing is those with a taxable income between $40-50k. With such a range and large amount of people utilizing this tax benefit the chances of it being removed again, are slim to none. 

 

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