According to the Australian ABC’s Vote Compass — a national survey that assesses Australian’s
political views — negative gearing is an issue that is dividing Australians.
For the uninformed, gearing is simply when you borrow money to invest, and it’s most
often talked about with regard to investment properties.
A property is negatively geared when the rental return is less than your interest repayments
and other expenses.
Why is it such a hot political issue?
Because Australian law allows investors to deduct any losses they make on an investment
property from their taxable income.
A lot of investors who buy properties don’t expect to make money on the rent.
Instead, they buy properties with the hope that the property will increase in value to
a point where they can cash in on its long-term capital growth and make a healthy profit from
its sale.
According to data from the Australian treasury, in the 2012-13 financial year, over 1.9 million
people earned rental income.
1.3 million of these reported a net rental loss.
That means almost 70% of property investors don’t make money from their investment — well
at least, not on an ongoing basis.
They are speculating that property prices will rise so they can cash in on the capital
growth.
But we all know, property prices in Australia don’t always rise.
They are currently falling.
So is negative gearing tax incentives just encouraging people to make poor investment
choices?
From ASIC’s MoneySmart website, it’s almost always better to positively gear a property,
that is, you borrow money to buy an investment property and the income from rent is higher
than the interest repayments and other expenses.
Of course this is the smarter choice.
In this example, we see that Rod and Karen have the same salary and both bought similar-valued
properties in the same neighbourhood.
But Rod has borrowed a lot more money to buy the property than has Karen, and therefore,
he has to pay back a lot more interest.
Rod is earning $26,000 a year on rental income, but paying $24,000 in interest and $5,000
in property expenses, for a total loss of $3,000 a year.
Thanks to negative gearing laws, that $3,000 comes directly off Rod’s taxable income.
Consequently, he has a total net income of almost $53,000.
Karen, on the other hand, borrowed a lot less money to buy a similar property by using her
savings to make a large deposit.
Although she’s earning the same amount in rent, due to her low interest repayments of
$6,000, and $5,000 worth of property expenses (the same as Rod), she actually makes $15,000
a year which adds directly to her taxable income.
Consequently, she has to pay more tax.
However, she still makes more total net income than Rod at almost $64,500 — about $11,500
more than Rod per year.
Rod is banking on the property price rising in value, but as we know with today’s climate,
he’ll probably be waiting a long time.
Some of you might be asking, what if Karen left her money in the bank instead of using
it as a deposit to buy a house?
Well, even if she found a savings account earning 5% interest (highly unlikely), her
after tax income would still be about the same.
The only difference being that her savings account has no potential for capital gain
(or capital loss for that matter).
So why do the government incentivise negative gearing?
The official line is that it increases housing supply, but I reckon its main purpose is to
keep property investors happy.
It allows them to speculate on the value of existing property.
If the real reason is truly to increase housing stock, then surely negative gearing tax incentives
should only apply to new construction.
Remember, Australian tax payers pay for all this property speculation.
The Government currently spends well over $11 billion a year on negative gearing and
capital gains tax concessions.
What if they used that instead to fund dental care, or better schools?
I think we’ve got our priorities a bit messed up in Australia.
The Australian Labor Party plan on doing something about if they are elected in the upcoming
election, 18 May 2019.
They are proposing to limit negative gearing to new housing from 1 January 2020.
They will also halve the capital gains tax discount (from 50% to 25%) for all assets
held longer than 12 months purchased after 1 January 2020.
All investments made prior to the 1 January 2020 will be exempt from the new regulations.
The ALP’s official goal is to, “Put negative gearing to work by limiting it to new investment
properties to help boost housing supply and jobs.”
So what do Australians of different political persuasions think about negative gearing?
ABC’s Vote Compass asked respondents whether they agree or disagree with the following
statement, “There should be fewer tax breaks on investment properties”.
As expected, both Greens and ALP supporters mostly agreed with the statement.
59% of Greens, and 68% of ALP supporters supported cutting back on tax incentives such as for
negative gearing.
Only 15% and 13% of supporters disagreed with this statement.
For LNP and One Nation supporters, as expected, most disagreed with the statement, or at least,
were not supportive of it.
It seems like most LNP supporters like the idea of borrowing money to buy an investment
property, and then having the Australian taxpayer foot the bill when then lose money on rent.
When it comes to taxing the rich, the following question was asked, “How much should wealthier
people pay in taxes?”.
These are the results from Vote Compass for the supporters of each party.
Unsurprisingly, supporters for the Greens and the ALP support an increase in taxes
for wealthy people, at 84 and 80% respectively.
51% of One Nation supporters also support an increase.
Only 37% of LNP supporters support an increase.
If you have any knowledge of Australian politics, wealthy people often support the LNP, whereas
the working class often support Labor.
It’s just the way things are in Australia.
Surprisingly, the idea of tax cuts for wealthy Australians is not popular, even among wealthier
voters.
I think most Australians realise that we need tax in order to fund all the welfare and public
services that we have grown accustomed to in Austrlaia.
Anyway, that’s negative gearing in a nutshell.
It’s become a real political talking point of late.
If we want to make it easier for first home buyers to get into the market, it makes sense
that we limit it to new housing stock only.
What are your thoughts?
Should the taxpayer be funding property investors’ speculation, or should we modify the current
system and use the extra funds on better schools and hospitals?
Discuss your thoughts below.