There has been a lot of talk about possibly changing the policies surrounding negative gearing, as results of the study authorised by the Australian Housing and Urban Research Institute (AHURI) suggest that reforms could save the federal government more than $1.7 billion annually without hurting the lowest-income investors.
What Is Negative Gearing?
Negative gearing is a tax structure that lets owners deduct expenses for an investment property when the rental income gained is less than the total cost of owning and maintaining said property. Often referred to as ‘capital growth properties’, negatively geared investments are expected to appreciate long-term, likely outweighing any short-term financial losses.
While at the moment all investors are entitled to tax deductions, the new model proposes that the investors in the bottom half of income distribution should continue to receive 100% tax deduction; that the 51st to 75th percentile group should be entitled to only 50% deduction; and that those in the 76th to 100th percentile should receive zero deduction. This proposed model aims to control deduction for wealthy investors. However, not all analysts are convinced that these changes are for the better.
Negative Gearing Benefits: An Expert’s Perspective
In our interview with Prof. Sinclair Davidson of RMIT University, he strongly counters the idea that negative gearing is skewed towards the rich, saying that investors who have an average income of $80,000 own almost 80% of investment property. ‘So we are looking at people who are earning 60 to 70, just slightly below average weekly earnings; have really done it hard trying to get an investment property, trying to get themselves ahead,’ Davidson told Dollars with Sense.
For him, negative gearing is a standard business practice for property owners who, in turn, are able to maintain their property and rent it out at a reasonable cost. And the fact that most owners are ‘not rich people’, but are actually self-funded professionals, puts them in a more vulnerable position for financial risk.
Prof. Davidson explains, ‘Bear in mind these are unincorporated businesses so they’re all at risk, so if anything goes wrong in the property market these people could lose their own house . . . or if there’s a downturn in the economy, this is a risky business for them.’
Aside from its budget deficit in the government, negative gearing is also criticised for putting pressure on housing prices, encouraging people to just rent as opposed to try and purchase their own homes.
Supporters of negative gearing, however, believe that the tax structure stabilises rent cost because it stimulates the supply. Additionally, experts like Prof. Davidson contend that these notions are ‘just completely fallacious’, and that instead of looking at negative gearing, other constraints (e.g., available land, owner regulations) in the supply and demand of housing property in Australia should be examined.
Further debate will determine if negative gearing will be retained, modified or removed altogether. Since more than 30% of all Australians are currently living in rented homes, any future decision will definitely impact most people in the country.