Negative gearing escapes budget axe

Negative gearing – the ability to reduce your taxable income by losses incurred by investments (particularly rental investment properties), will remain available to Australian investors beyond this budget despite recently becoming a hugely controversial issue in recent times.

It is no surprise that this tax benefit hasn’t been removed. The 226 politicians that make up the Australian Senate and House of Representatives own, on average, about 2.5 rental properties each¹. It would take a large number of politicians to be altruistic and act against their own best interest for it to change.

The argument against keeping negative gearing is fairly simple: over half of geared housing investors are in the top 10 per cent of personal taxpayers and 30 per cent earn more than $500,000².

There are estimates that tax revenue would increase by up to $4 billion per year if it were scrapped³, but the reasons for keeping negative gearing are debated much more vigorously and usually revolve around the potential effect on the taxpayer and the housing & rental markets: if the benefit of negative gearing is lost to taxpayers, they won’t be able to afford to keep their investment properties and will either be forced to sell, flooding the real estate market & causing a fall in value, or will need a higher return on investment, meaning that rents will rise.

Negative gearing was removed in Australia from 1985 to 1987. Treasurer Joe Hockey has stated on numerous occasions that it caused a huge surge in rents, while critics of negative gearing argue that rents only rose in Sydney and Perth and was caused by other factors, such as vacancies being at extremely low levels.

The cynic in me can’t help but wonder why this wasn’t such an issue during the Global Financial Crisis (when the Labor Party was in power). The fact remains that about 1.2m Australians take advantage of negative gearing³ and that is a large portion of the electorate to annoy (again, I’m cynical). The fact also remains that interest rates are at record lows so, if you are able to, why wouldn’t you make use of this great tax benefit? Better to make use of a benefit than it is to complain about others who do while you watch. Just keep in mind that there are plenty of people that want that tax benefit removed, and who knows what will be on the chopping block in the future.

Daniel Causerano

Accountant – OPTIMA PARTNERS

¹ http://www.smh.com.au/business/the-many-houses-of-parliament-propertyrich-pollies-have-vested-interest-in-high-prices-20140806-10110y.html

²http://www.tradescareer.com.au/news/study-slams-housing-help-at-high-end

³http://grattan.edu.au/news/negative-gearing-the-economic-reasons-why-government-must-kill-this-sacred-cow