Rise in low-income households on welfare using negative gearing: KPMG

Amid the debate over negative gearing ahead of the budget, a new study has found that low-income households are using negative gearing to get into the property market while paying no net tax after welfare benefits has climbed to 60 percent. 

A study by KPMG says the bottom fifth of households (ranked by income) have enjoyed growth in “investment income” of 8.5 percent a year over the past decade, more than four times faster than the other 80 percent, according to a report in The Australian.

This was “confirmed by the substantial increase in value of second mortgage payments being undertaken within this quintile,” the study found.

It suggested the share of households paying no net tax — after welfare payments are netted against income tax paid — has reached 60 percent, which is above most conventional estimates that put the figure nearer 50 percent. 

The report analysed Melbourne Institute and ABS households income data over the 20 years to 2015.

KPMG chief economist Brendan Rynne was cited by The Australian as saying that a further government review was needed “as it suggests that the loosening of transfer payments after the GFC were never properly tightened up again — and it is very difficult to withdraw benefits once they have been granted”.

The number of low-income households with second mortgages is estimated to have more than doubled to above 37,000 since 2006.

“While it is perhaps understandable that the poorest members of our society want to diversify and increase their incomes, this group is the least able to take on the financial risk associated with geared investment activity,” Rynne said. “It is clear from our analysis that if the bubble does burst it will not just be the better-off who will be directly affected, the poor will be too.” 

The KPMG report finds half of the income of the poorest households was derived from government transfers.

“This outcome has in part been influenced by the growth in the Australian minimum wage … to $657 a week in 2015,” the report said.