As Australia’s property market continues to grow and affordability remains a key concern the subject of negative gearing is never far from the spotlight.
The current government continues to rule out scrapping the policy, while Labor and the Greens recently flagged significant changes under their party platforms.
Many are calling for the controversial tax break to be abolished in an effort to help more first home buyers enter the market.
So is negative gearing fueling an affordability crisis in Australia’s property market?
We chatted to the experts about the policy and what it means for the property sector.
Negative gearing is a tax rule that allows investors to claim losses experienced by their assets as a tax deduction.
As it relates to rental properties the Australian Tax Office states: “A rental property is negatively geared if it is purchased with the assistance of borrowed funds and the net rental income, after deducting other expenses, is less than the interest on the borrowings.
Financial adviser Bruce Brammall says while the tax rule is available to other investments it is primarily used for property.
“It does allow you to go into what would otherwise be a negative cash flow investment,” he says.
“Negative gearing does mean you are losing money.
“The only way it makes sense is if the asset you hold is increasing at a rate that’s preferably multiple times the rate you are gearing.”
CoreLogic RP Data Head of Research Tim Lawless says the most recent ATO taxation data provides an interesting overview of who is claiming negative gearing benefits.
“In terms of the number of individuals claiming net rent, 68.9% of claimants had a taxable income of less than $80,000,” Lawless says.
“While more taxpayers with a taxable income of less than $80,000 claim net rent losses, it accounts for only 13.1% of all individuals with a taxable income below $80,000. On the other hand, more than a quarter (25.8%) of all taxpayers with an income of more than $80,000 claimed net rent.”
“In terms of the value of these losses, individuals earning less than $80,000 claimed rental losses of $2.781 billion or an average of $2,050 per claimant.”
He says while many Australians take advantage of the tax rule “it is those with higher incomes which garner the greatest benefit from a negative gearing strategy”.
Brammall says there are a lot of issues at play when it comes to affordability, and to single out negative gearing is shortsighted.
He says low interest rates, a reasonably strong economy and the cyclical nature of the property market – which has been on the up for the past three years – all conspire to increase property prices.
Lawless says negative gearing has always been a contentious issue.
“For those that already own investment properties it means that they can offset their losses against their taxable income, for those that don’t own a home many feel that the availability of negative gearing is advantageous for those who already own a home compared to those who don’t.
“The availability of negative gearing undoubtedly makes investment more attractive however given so many utilise it, particularly for residential property, I believe it is unlikely to be removed.”
However Adrian Pisarski, Chair of housing advocacy group National Shelter, says Australia’s current tax arrangements undermine housing affordability.
“We are witnessing what happens when the expectation of capital gain backed by tax exemptions and bolstered by generous deductions drives speculative investment in our housing markets,” he says in recent comments on the issue.
“High prices damage productivity, drive key workers to the fringe of our cities and lock low income households out of wealth generation, consigning them to deteriorating rental markets and lengthy commutes.”
Australian Council of Social Services CEO Dr Cassandra Goldie says the tax system needs to be reformed.
Commenting upon the release of a recent ACOSS report Fuel on the fire: Negative gearing, Capital Gains Tax and housing affordability, she says tax breaks have played a role in ever housing boom for the past three decades.
“Between 2000 and 2013, lending for investment housing has risen by 230% compared with 165% for owner occupied housing,” she says.
“While tax concessions are not the only problem in the housing market, they are a significant driver of speculative investment and price inflation. Reform must be seriously considered as part of the Government’s current tax review.
“The Government must also work to develop a strategy to improve the supply of affordable rental housing in partnership with the state and territory Governments, and to ease the pressure on low income renters in rental stress through reform of Commonwealth Rent Assistance.
On the other side, Brammall says it’s important to look at the policy in a broad sense.
“I don’t think it’s evil. I understand there are people who want it limited,” he says.
But he says the consequences of getting rid of negative gearing “would be fairly severe”.
“The Hawke/Keating government tried to get rid of it in the 80s. What they found was that property investors weren’t prepared to wear the losses so rents spiked.
“It also meant people got out of the property market so prices went down.
“I don’t think people understand that it does help keep rent costs down and for people who own it helps keeps prices higher than they would be otherwise.”
Lawless agrees there would be challenges with abolishing the rule.
“What it would likely mean for the housing sector is that investors would want to see higher rental returns than those currently on offer. Furthermore, the Government may have to play a larger role in providing social housing if investment levels reduced,” he says.
“Ultimately I can’t see negative gearing being removed as a taxation policy.
“Too many people are already using a negative gearing strategy – removing the tax benefits at a time when gross rental yields are at or approaching record lows and when investors comprise a record high proportion of buyers in the market could cause a significant disruption to housing market conditions.
“With the majority of household wealth contained within the housing sector, any policy changes that risked the safety of this asset class would be unpopular to say the least. ”
Information supplied by www.realestate.com.au