Should we axe negative gearing?Tax reform is certainly something that’s on the agenda, and everyone seems to have a different opinion. As the joke goes, “for every economist there’s an equal and opposite economist”.
There are all sorts of ideas floating around, but one of the hot topics right now is negative gearing.
Don’t worry if you need a refresher on what that is, we’ll get into it later.
Why now?
For context, there’s a tenuous balance of power in the Senate. Labor needs support from the Greens and at least two crossbenchers to get their ‘help to buy’ housing scheme through.
In fact, they can’t get much through without that support, unless the Coalition is on board.
Whilst Labor holds a very slim majority in the House of Representatives, they currently hold only 26 of 76 seats in the Senate.
In exchange for their support, the Greens want to see big changes to tax concessions for investors, and they’re more than willing to push the issue.
What is negative gearing?
The term ‘negative gearing’ isn’t something you’ll find in legislation. The Treasury defines it as “a commonly used term used to describe a situation where expenses associated with an asset (including interest expenses) are greater than the income earned from the asset”.
So, really, negative gearing is offsetting income tax by reporting a loss from an investment.
If you made $50,000 in rent on an investment property but spent $60,000 on expenses such as mortgage repayments, insurance, council rates, maintenance costs and agent fees, you get to knock that $10,000 off your taxable income. The rest isn’t counted as income at all.
Meanwhile, you’re sitting on an asset that is very likely to increase in value. This wouldn’t be as enticing for people on the lower end of the wealth scale, but for people who are paying a higher marginal tax rate and have money in the bank? Well, why not.
So what’s the problem?
The trouble is, this turns housing into an investment opportunity and a clever tax loophole rather than…well, rather than a basic human right.
Some investors might choose to maintain a loan that they can afford to pay off, simply because they can write off interest as a loss and still hold on to the property with the expectation that its value will increase.
According to recent data from the Commonwealth Bank, about 80% of applicants for investor home loans are earning between $150,000 and $500,000 a year.
Negative gearing is also the reason that some investors don’t mind if a property sits empty. Taxpayers subsidise the cost of leaving homes to gather dust, even while we desperately scramble to improve the housing crisis.
Meanwhile, last year Anglicare reported that less than 0.5% of private rentals were affordable for a person living on a pension.
Research from the Australia Institute found that most of the benefit of negative gearing goes to high-income households, with only 6% of this tax concession directly benefiting the bottom 20% of earners.
By contrast, somewhere around 50% of negatively geared properties are owned by people who are in the top 20% of earners. In 2019-20, the average household income of this group sat at $4,306 per week after tax. There’s no up-to-date data available but you can bet that amount has only gone up. It’s estimated that the average accumulated wealth of this group sits at around $3.2 million.
According to a report from the Australian Council of Social Service and the University of New South Wales, the average wealth of this group has grown four times faster than low-income earners.
The reasons for this are complicated, but tax reform is one way that we can slow down the growth of inequality in Australia.
So what next?
There have been calls for ‘political courage’ in rolling back tax discounts for investment properties. From elsewhere, there are rumbles of discontent and doubt as the Albanese Government has firmly stated that there are no current plans to axe negative gearing.
For now, the Greens seem firmly committed to pushing this agenda. Their current proposal is for negative gearing to be limited to one investment property and for the extra tax income to be invested into social and affordable housing.
Historically, this has been seen as a political ‘third rail’. As in, if you touch it, you’re a goner. But if our politicians make every decision based on re-election, or act only in response to pressure from wealthy and powerful lobbyists rather than looking at expert advice or the economic climate, where does that leave the rest of us?
CPSA’s position has long been that Australia’s economic policy should prioritise a more equitable distribution of wealth, and that property investors should not have access to tax advantages such as negative gearing as this only serves to deepen wealth inequality.
It’s not a simple matter, and there are no simple solutions. However, it’s clear that something needs to change and that we need strong leadership to make that happen.
In other news
Tax reform is certainly something that’s on the agenda, and everyone seems to have a different opinion. As the joke goes, “for every economist there’s an equal and opposite economist”.
There are all sorts of ideas floating around, but one of the hot topics right now is negative gearing.
Don’t worry if you need a refresher on what that is, we’ll get into it later.
Why now?
For context, there’s a tenuous balance of power in the Senate. Labor needs support from the Greens and at least two crossbenchers to get their ‘help to buy’ housing scheme through.
In fact, they can’t get much through without that support, unless the Coalition is on board.
Whilst Labor holds a very slim majority in the House of Representatives, they currently hold only 26 of 76 seats in the Senate.
In exchange for their support, the Greens want to see big changes to tax concessions for investors, and they’re more than willing to push the issue.
What is negative gearing?
The term ‘negative gearing’ isn’t something you’ll find in legislation. The Treasury defines it as “a commonly used term used to describe a situation where expenses associated with an asset (including interest expenses) are greater than the income earned from the asset”.
So, really, negative gearing is offsetting income tax by reporting a loss from an investment.
If you made $50,000 in rent on an investment property but spent $60,000 on expenses such as mortgage repayments, insurance, council rates, maintenance costs and agent fees, you get to knock that $10,000 off your taxable income. The rest isn’t counted as income at all.
Meanwhile, you’re sitting on an asset that is very likely to increase in value. This wouldn’t be as enticing for people on the lower end of the wealth scale, but for people who are paying a higher marginal tax rate and have money in the bank? Well, why not.
So what’s the problem?
The trouble is, this turns housing into an investment opportunity and a clever tax loophole rather than…well, rather than a basic human right.
Some investors might choose to maintain a loan that they can afford to pay off, simply because they can write off interest as a loss and still hold on to the property with the expectation that its value will increase.
According to recent data from the Commonwealth Bank, about 80% of applicants for investor home loans are earning between $150,000 and $500,000 a year.
Negative gearing is also the reason that some investors don’t mind if a property sits empty. Taxpayers subsidise the cost of leaving homes to gather dust, even while we desperately scramble to improve the housing crisis.
Meanwhile, last year Anglicare reported that less than 0.5% of private rentals were affordable for a person living on a pension.
Research from the Australia Institute found that most of the benefit of negative gearing goes to high-income households, with only 6% of this tax concession directly benefiting the bottom 20% of earners.
By contrast, somewhere around 50% of negatively geared properties are owned by people who are in the top 20% of earners. In 2019-20, the average household income of this group sat at $4,306 per week after tax. There’s no up-to-date data available but you can bet that amount has only gone up. It’s estimated that the average accumulated wealth of this group sits at around $3.2 million.
According to a report from the Australian Council of Social Service and the University of New South Wales, the average wealth of this group has grown four times faster than low-income earners.
The reasons for this are complicated, but tax reform is one way that we can slow down the growth of inequality in Australia.
So what next?
There have been calls for ‘political courage’ in rolling back tax discounts for investment properties. From elsewhere, there are rumbles of discontent and doubt as the Albanese Government has firmly stated that there are no current plans to axe negative gearing.
For now, the Greens seem firmly committed to pushing this agenda. Their current proposal is for negative gearing to be limited to one investment property and for the extra tax income to be invested into social and affordable housing.
Historically, this has been seen as a political ‘third rail’. As in, if you touch it, you’re a goner. But if our politicians make every decision based on re-election, or act only in response to pressure from wealthy and powerful lobbyists rather than looking at expert advice or the economic climate, where does that leave the rest of us?
CPSA’s position has long been that Australia’s economic policy should prioritise a more equitable distribution of wealth, and that property investors should not have access to tax advantages such as negative gearing as this only serves to deepen wealth inequality.
It’s not a simple matter, and there are no simple solutions. However, it’s clear that something needs to change and that we need strong leadership to make that happen.
