NEGATIVE LOGIC ON NEGATIVE GEARING &
WORK RELATED EXPENSES
Negative gearing: In accounting the matching principle dictates that expenses must be matched against the revenues that they earned. It is one of the basic and underlying principles of accounting theory and our taxation system.
The effect of the matching principle is best demonstrated by the way we claim the cost of a non-current asset as depreciation over a number of years. For example, when a motor vehicle is purchased we can’t claim the whole cost as an expense because it is expected that it will be utilized over more than one year.
You might find theoretical discussion of accounting principles boring, but the matching principle is relevant to some changes to our tax system that may come to pass. The first would see restrictions to negative gearing, and the second would see work related expenses being eliminated in order to fund tax cuts.
Negative gearing has been a topical issue for a while now. As you could expect, those who are able to benefit from it, love it. There is no settled argument about the effect negative gearing has on rents, housing costs or supply. What is fact is that allowing a tax deduction for expenses incurred in the derivation of one’s assessable income has been a basic tenet of our income tax system since its inception. In this context, negative gearing of active or passive asset investments is not a tax anomaly.
It’s also worth noting that income earned by one taxpayer is typically the deduction of another taxpayer, so to not allow these investment losses to be deductible would give rise to double taxation. I would rather see the government consider other changes than to alter negative gearing in order to preserve the integrity of the tax system.
Part of the reason that negative gearing is such a controversial issue is because it is closely linked to the capital gains discount. Negatively geared assets can be sold for a capital gain, and if that asset has been owned for more than a year 50% of that gain is discounted and becomes exempt from being taxed. As much as I like that discount, I think that changes to the Capital Gains regime would be more appropriate, particularly a reduction of the discount.
Other examples of losses not being deductible exist for good reason. Capital losses are quarantined to be offset against future capital gains, and non-commercial loss rules exist to ensure that individuals don’t intentionally achieve losses on a sole-trading business in order to reduce their income.
Work related expenses are simply explained: they are expenses incurred in the process of performing one’s job. Work related deductions, such as travel, self-education, depreciation on work equipment and laundry of uniform, are expenses that are required in order for a taxpayer to derive an income so they are deductible, which clearly fits the parameters of the matching principle.
The UK and New Zealand have tax systems that have removed work-related deductions, but they also have much more simplified tax systems for individual taxpayers. Without a massive overhaul of our taxation system, the elimination of work-related deductions in exchange for cuts to marginal individual tax rates frightens me. Perhaps I am cynical, but personal tax rate cuts are only as lasting as the next federal budget.
It would also be a large step towards the end of a tax system based on self-assessment. Self-assessment means that the information provided to the ATO is initially accepted as being true and correct when a tax return, and any other forms on which tax liability, is disclosed. I’m just not comfortable to cede control of my tax return to the government.
I think that tax reform can simplify our tax system, making it much more efficient. That’s why I’d rather see an increase in GST in exchange for eliminating other taxes, such as stamp duties on insurance, motor vehicle registrations, conveyancing duties and even payroll taxes and cuts to individual & company tax rates. Instead, I think that changes to negative gearing would be opportunistic in that they take advantage of the negative sentiment without certainty of all of its effects, while changing treatment of work-related deductions should be sacrilege, and either change would directly contravene the matching principle.