Why Negative Gearing Will Stay

There are many reasons the latest push to do away with negative gearing is unlikely to come to much. One is its sheer popularity.


The tax rules that allow negative gearing of property are used not just by the affluent but by many in the middle class. This includes voters in Labor territory in Canberra, Brisbane, Melbourne and Sydney. Work by the National Centre for Social and Economic Modelling shows a swag of Labor seats where more than one in 10 voters have negatively geared property. Social Services Minister Scott Morrison pointed out recently that net rental losses are claimed by 54,000 teachers, 36,000 nurses and tens of thousands of other ordinary workers.

Opposition Treasury spokesman Chris Bowen would have been well aware of this when he acknowledged last week he could not envisage either side of politics abolishing negative gearing in its entirety. Earlier this month Tony Abbott ruled out any changes to negative gearing. But Mr Bowen left open the possibility of Labor going to the next election with a policy of winding back the tax break for future investors in property. We’ll see.

Although low interest rates and higher rents are reducing the scope for negative gearing, it is likely to remain attractive to many taxpayers — and there are sound policy reasons for this. In 2012-13 there were 1.26 million taxpayers with negatively geared property, down from 1.32 million the year before. But the longer-term trend is one of increasing resort to negative gearing. In 1993, the tax office recorded $1.9 billion in rental losses. In 2012-13, the figure was $12bn.

It’s a longstanding principle that investment costs — including interest payments — may be offset against income. Why should one investment class — property — be excluded? Many people with an eye to self-sufficiency in retirement opt for bricks and mortar because it is a tangible, understandable investment. If today’s negatively geared property becomes tomorrow’s retirement income stream, that means less pressure on the aged pension.

In policy terms, even critics of negative gearing do not pretend it’s the main game in the struggle to create a simpler, fairer and more competitive tax system. A distorted property market is a separate complaint of some commentators; they say negative gearing contributes to a housing bubble as investors edge out first-home buyers. But that is a Sydney-centric and overblown argument. In hot capital city markets, the key interaction has been low interest rates and double-income buyers competing for a limited number of properties in prime areas. The bigger picture includes tight land supply and planning rules that hamper medium-density development. These constraints, and their effect on housing affordability, have been well-documented but the remedies are in the hands of state and local government.

In already hot property markets, negative gearing may be a factor pushing up prices but it also contributes to the stock of rental accommodation in sought-after areas in our cities. In 2012-13, tax office figures showed that about two-thirds of property investors used negative gearing. This arrangement may help restrain rent increases, especially when interest rates are low. Remember what happened in 1985 when the Hawke government put a stop to negative gearing? Rents soared and 18 months later negative gearing was reinstated.

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Source The Australian