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172 | AUSTRALIAN HOUSE & GARDEN
T
he debate around negative gearing
has become quite heated of late,
particularly when the spotlight is
fixed on housing affordability. There are
people who claim that negative gearing
inflates house prices and hurts first-
time buyers. Then there are those who
argue that it helps renters by boosting
Australia’s supply of rental properties.
Negative gearing is essentially a
form of financial leverage. It allows
an investor to gain tax advantages by
buying a rental property (or shares)
with borrowed money, where the rental
income (or dividends) doesn’t fully cover
all the running costs, such as interest,
rates and maintenance. The annual loss
can then be claimed as a tax deduction.
This concession is estimated to cost the
Federal government between $4 billion
and $5 billion a year in lost revenue.
But hang on, isn’t a loss still a loss?
The pay-off comes when the investor
sells the property at a higher price and
makes a capital gain, at which point
there’s another tax perk. Not only has
the taxman helped with those interest
payments, but the tax on capital gains
is half the rate paid on wages, salary or
other ‘passive’ income. It’s a pretty good
deal all round, at the taxpayer’s expense.
Of course, an investor must be able to
support losses until the property is sold
(or becomes ‘positively’ geared because
rents have risen over time or interest
rates have fallen). Conventional wisdom
holds that negative gearing offers most
benefit for those on higher incomes,
because they can avoid higher tax rates
and are in a position to support losses.
The argument that ‘nurses and tradies’,
or ordinary working people, are themajor beneficiaries of negative gearing
may have political appeal but has
limited support among economists.
As to whether negative gearing is
good public policy or not, it depends
on who you listen to. The ALP wants
to abolish negative gearing on new
housing, so investors already negatively
geared would not be affected. The
Coalition opposes reform of negative
gearing, although some Liberal
politicians – including former Federal
treasurer Joe Hockey and former NSW
planning minister Rob Stokes – disagree.
What do the real experts say? Professor
Sinclair Davidson of RMIT University,
who’s also a senior research fellow at
the conservative Institute of Public
Affairs think tank, believes changing
negative gearing would make it harder
for Australians to provide for retirement.
“Negative gearing is not distorting the
Australian taxation system,” he says.
“It reflects efforts to make the tax
system neutral across asset classes.”
Former ANZ chief economist Saul
Eslake has a different take. “The main
impact of negative gearing,” he says,
“is to put further upward pressure on
the price of established dwellings, to the
detriment of those who are looking to
buy dwellings to live in.”
So, take your pick and look after your
own interests – everyone else does. #Land of the loss Australia, New Zealand and Japan
lead the world in offering the most generous tax treatment of
negative-gearing losses. Some other countries allow negative
gearing but do not permit losses to be offset against wages and
salaries, only against passive income such as dividends. In the
US, even interest on owner-occupied housing is tax-deductible,
although economists don’t consider this a great model.Property
TAXING TIMES
Whether you love or loathe negative gearing, it pays
to understand the system, writes Harvey Grennan.