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Negative Gearing Reform… What Is On The Table?

Negative gearing reform… what is on the table?

At a very high level, negative gearing for property investment is when your interest and outgoings expense is greater than the rental income earned, resulting in a loss on the property which can be claimed as a tax deduction. i.e. the extra funds being contributed to the property each year to cover the interest and outgoings shortfall, becomes a deduction in the owners tax return.

Almost every property investor in Australia who has borrowed to buy property would have relied on this tax break to support his or her property investments. Essentially, he or she can save the tax each year on their investment property loss (as explained above), with the hope that he or she will realise a benefit from both the capital gain on the investment and eventually the income when the rent becomes higher than the interest and outgoings expense.

Considering the lack of affordability in the property market, as well as the financial state of affairs of the federal government, negative gearing is firmly under the microscope for reform.

According to The Guardian’s analysis of recent Australian Tax Office data, there has been a 9.2% increase in the number of property investors that own five or more properties since 2012/13. The data also showed that although only 22.3% of individuals earned over $80,000 in taxable income, 40.3% of this tax bracket negatively geared, with their total deductions equaling 49.5% of the total national rental loss. It is statistics like these that grab the attention of commentators and politicians and ultimately drive the discussion around reform. People are claiming negative gearing is simply a tax break for the rich and that it is a major contributor to the affordability crisis.

After taking a firm stance against Labour’s suggestion of ditching negative gearing all together, the government has instead indicated it will consider more “surgical” measures of dealing with housing affordability, suggesting that a limit on the number of investment properties an individual can use for negative gearing purposes may be the best way forward. Alternatively, a dollar value limit on the amount an individual can negatively gear is also an option.

Assistant Treasurer Michael Sukkar has said that less than 10% of people who negatively gear own more than two properties, so such limits would be consistent with their intention to take a measured approach to the reforms.

I would question whether capping the number of properties will have any impact on housing affordability at all. As mentioned by Sukkar above, the proposed changes may only affect 1 out of 10 property investors. The reforms will probably push these investors into higher value properties to maximise their investment value. These higher value properties tend to have poorer rental yields and higher negative gearing benefits. It is therefore possible that this cap may in fact increase the tax deduction being gained by the larger investors as they are incentivised to invest in higher value properties with lower rental yields.

Something else to consider is that both the Grattan Institute, and the Housing Industry Association warned that the federal government must be mindful of the unintended consequences of putting such caps or dollar value limits in place – by making property investment less attractive, you may in fact worsen the affordability issue by hindering supply. What does this mean for the third of the population who currently rent?

At the end of the day, scrapping negative gearing is not going to solve the housing affordability issue – I see it as more of a budget decision for the government. If they want to make housing more affordable they need to work with industry to increase supply in relevant areas, or relieve the demand through infrastructure projects so people can live further away from where they work and be more flexible.

As a property owner or investor, it is important to stay on top of the market as well as the political landscape. Changes such as these can have significant long term effects on your portfolio and your financial position.

It’s a good idea to speak with your lending specialist regularly to make sure you are across any relevant issues.

 

Ben Hawley

0413 766 888

 

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