Changes to negative gearing puts growth at risk
Negative gearing has improbably
become the tax measure most likely to be reformed in the upcoming federal
And possibly the only tax reform to
occur at the federal level for the indefinite future (unless you count modest
cuts to income tax as a structural change to the tax system).
Not many of us saw this coming. With
GST, company tax and stamp duty dominating the tax mix switch debate for 12
months, Labor’s announcement last weekend that it would abolish negative
gearing on established homes from July 2017 (as well as effectively double the
capital gains tax payable on investment properties) came out of left field.
And while the government was quick to
rubbish the proposed changes, the Treasurer indicated he is actively
considering negative gearing reforms of his own – to rein in what he calls
“excesses or abuses” of the system.
Not quite bipartisan reform then, but
more meeting of minds than we have seen on any other tax topic.
So what will be the affects of
winding back negative gearing?
Gearing is of course where the total
costs of owning a home (interest, land tax, rates, repairs and so on) in a
financial year are higher than the rent received. It entitles the owner to a
net deduction from taxes they would otherwise have to pay on earnings and other
Like any deduction, those in the
highest tax bracket save the most tax. And yet, ATO figures show that two
thirds of property investors across Australia who negatively gear earn a
taxable income of less than $80,000 a year. This includes 53,800 teachers,
52,000 retail workers, 35,900 nurses and midwives, 22,600 hospitality workers
and 10,400 emergency service workers.
Now, of course, $80,000 is the
taxable income of these Australians, after deductions from investment
properties and work-related expenses have already been made, as Chris Bowen has
pointed out. In other words, the gross income of these people was higher than
$80,000 before the tax deduction was applied.
And yet the average loss claimed by
Australians who own an investment property is $9500 a year, which doesn’t bump
up the gross earnings of the average negative gearer into a much higher tax bracket.
There are only so many ways to reduce
the costs of property ownership, if negative gearing is wound back. The easiest
– and most likely – way is for investors to increase rents. Not a very
effective affordable housing policy in that case.
First published on Domain.com.au, 20 February 2016.