Scrapping negative gearing would have consequences far beyond an investor's tax return

Doesn’t negative gearing just help the rich get richer?

According to 2011-12 ATO statistics, there were 12,736,030 individual taxpayers in Australia and 1,897,668 (14.9%) of them owned one or more investment properties. 73% of property investors own one property and only 4% of investors own four or more properties. For a property to be negative geared there must be a significant debt against it (they don’t own it outright).

In other words, an overwhelming majority of investors are ordinary mums and dads; they are attempting to fund their own retirement, as opposed to being a burden on Australia’s taxation system via government-funded pension.

Doesn’t negative gearing reduce the amount of revenue available to governments each year?

A report produced by REIA in August 2014, mentioned that a total of $7,860 million in losses were claimed by Australian property investors in 2011-12. The ATO also charged extra taxes on the $5,939 million worth of investment property profits.

Should changes ever be made to negative gearing and results in fewer property transactions each year, governments would stand to lose a lot more tax revenue from stamp duties, infrastructure charges, land tax, construction industry payroll taxes, and more. The existing $71 billion (and growing) spent each year on tax-payer funded pensions and allowances will increase significantly. 

What impact would the removal of negative gearing have on Australia’s housing supply?

According to 2011 Census data, Australia has 9,117,003 residential properties and we are adding approximately 160,000 more each year. Negative gearing is a tax-policy linked to property – other policies include stamp duty, first home buyer incentives, tax rebates and incentives to purchase new property, land tax, and capital gains tax.

Tightening of any of these policies will directly influence consumer behaviour and become a disincentive to buying and holding property. As we’ve seen already with ‘new home building grants’, the introduction and removal of tax policies directly affects the construction industry (Australia’s biggest industry by direct and indirect jobs).

What about Australia’s social housing problem?

75% of residential properties in Australia are occupied by the owner. Of the remaining 25% that are rented only 5% are provided by governments. Governments can’t afford to fund social housing (some governments have actually been selling off parcels of properties in order to raise money for other reasons).

The National Rental Affordability Scheme (NRAS) is government admission of our social housing shortfall which governments can’t fund so they developed a policy designed to encourage others to do it for them. Removal of negative gearing would be a gross contradiction to this.

How might the removal of negative gearing affect Australia’s welfare system?

Australia’s financial literacy crisis is in our DNA - only 4% of people are financially independent by age 65. The federal government have said that we can't support our ageing population with our unsustainable reliance on tax-payer pensions. They have touted the possibility of the superannuation age increasing to 70. Stripping back incentives which encourage investment would only compound this country's problem.

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Does negative gearing force property prices up and make it harder for first home buyers to get in to the market?

Property markets are affected by dozens of factors. The factors which affect property values the most are related to the general economy, employment, and credit policies, not tax policies). When property markets perform strongly, like they have in Sydney in 2013-14, it is not uncommon for segments of the community to blame investors for driving values up and making bit harder for others to get in.

Negative gearing has been in place for generations and it is no more responsible for Sydney’s property price growth in 2013-14 than it was for its flat-line performance from 2001 to 2008.

Doesn’t negative gearing make rents more expensive?

In July 1985, in response to claims that negative gearing was the primary cause of property rents rising uncontrollably, the Hawke government quarantined negative gearing. During the two years that the quarantine was in place, ABS figures show rents rose by an average of 22%. The policy was reversed in 1987 and rents still rose by 21% over the next two years. A similar trend occurred with property values. As mentioned previously, tax policies have a smaller impact on property markets (values and rents) than most people think.

What other potential impacts could occur if negative gearing was tinkered with?

Propertyology often describes property investment as a business – the business of providing accommodation – and the investor’s role is akin to that of a company director (to make responsible decisions which are in the best interest of your balance sheet and profit and loss statement).

Negative gearing involves claiming interest expenses from borrowings plus other costs associated with maintaining an asset in much the same way that more traditional businesses do. Similarly, a share investor will claim the interest expense from their margin loan. Time will tell whether property investors will be singled out or not.

A final word...

Rumours of negative gearing getting scrapped arise almost every year – either in the lead up to a federal budget or whenever there is a major review of Australia’s taxation policies. It is the responsibility of governments to periodically review everything; nothing lasts forever. The reality however is that negative gearing has existed in Australia for a few generations.

In the event that negative gearing was ever scrapped, there might be some short-term referred pain but the real estate body will eventually realign itself (once the dust settles, it will be business as usual again for most property investors).  The potential implications to scrapping negative gearing will be spread a lot further than property investor’s tax returns. Any government who is bold enough to make a change faces consequences far greater than the revolt of 1.9 million people at the election box. For these reasons, it is my view that negative gearing will survive further generations.

Simon Pressley is managing director of Propertyology, a full-time property market analyst, accredited property investment adviser, and Australia’s (REIA) Buyer’s Agent of the Year (2012+2013+2014)