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Negative gearing debate remains stuck in neutral

Negative gearing has dominated the headlines of late as both the Federal Government and Opposition take turns announcing their intentions over the strategy.

The current rules allow buyers to borrow money to buy a property and if the mortgage repayments are larger than the rental income, then that loss can be offset against the borrower’s taxable income. It’s a practice that makes buying property as an investment an attractive strategy, especially when combined with the capital gains discount.

Labor says if elected it will limit negative gearing to new properties and halve the capital gains discount from the current 50 per cent (if held for 12 months) to 25 per cent. It says this will save $7 billion a year and level the playing field for all buyers. Labor’s changes would only apply after July 1, 2017, so existing arrangements would remain untouched.

In response, the Coalition initially said it had no plans to increase capital gains tax but Treasurer Scott Morrison was considering targeting negative gearing “excesses” – or people who gear multiple properties. The government was looking at placing a limit of $20,000 on the annual deduction that could be claimed from negative gearing.

“It has been reported that the Federal Government will no longer target negative gearing as part of its tax reform policy.”

Since then, however, it has been reported that the Federal Government would no longer target negative gearing as part of its tax reform policy. The Australian Financial Review quoted sources that said the proposal to cap deductions at $20,000 is something that would no longer be considered. Its tax plans will not be unveiled until the lead up to the May budget.

 

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Political hot potato

Negative gearing has been a political hot potato for a while – blamed for fuelling the high property prices in capital cities and consequently locking first-home buyers out of the property market while benefiting investors.

Those opposed to Labor’s plans say cutting out the tax breaks won’t make housing cheaper; rather it’s the low interest rate environment that has contributed to the high property prices.

AMP Capital chief economist Shane Oliver recently told CNBC that the high property prices are a response to poor supply over the past decade.

“Australia has a problem where land release is very slow and restrictive, especially in capital cities,” he says. “There’s a lot of regulation and red tape around what developers can and can’t do, so I think that’s the real reason why property prices are quite high.”

Oliver says limiting the dollar value of negative gearing concessions per taxpayer makes more sense than forcing all investors into new housing.

The Property Council of Australia launched a multimedia advertising campaign in February aimed at convincing both sides of politics to leave negative gearing alone. The Council says there are 2 million Australians who own an investment property and of these, about 1.2 million use negative gearing.

 

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Vital for securing financial futures

The Council’s chief executive Ken Morrison says the property industry is vital to Australia’s economy and GDP. “Sudden lurches in policy are risky to an industry that is contributing so much to jobs and growth,” he says. “Negative gearing is a vital part of the means by which Australians, from all walks of life, secure their financial future.”

He asks: “Why play around with taxation arrangements that have been in place for over 100 years on a part of the economy Australia is relying on?”

Meanwhile, economist Saul Eslake has long believed negative gearing should be amended. He disputes the argument that it makes an important contribution to growing the supply of rental housing. In a February interview for the Australian Financial Review newspaper, he stated: “Over the past decade, more than 93% of the total amount lent to investors for the purchase of housing has been for the purchase of established housing. Conversely, investors have accounted for just one-fifth of the total amount borrowed for the purchase or construction of new housing over the past decade.”

Eslake argues that the effect of negative gearing has been to inflate the price of existing housing. This, he says, is “to the detriment of would-be home buyers; to encourage Australians to take on more debt than they would have done otherwise; and to undermine, at a substantial cost in terms of revenue foregone, the efficiency and equity of the Australian tax system.”

The Federal Government’s decision not to meddle with negative gearing means if it wants to deliver personal income tax cuts it only has superannuation tax concessions and tax deduction trade-offs to play with. But former treasurer Peter Costello warned recently that super shouldn’t be touched. So it’s stay tuned for the May budget to find out what action will be taken.

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Gayle Bryant

Gayle has been a financial and business journalist and sub-editor for almost 30 years. She has written for a wide range of newspapers, magazines, custom and trade press and websites. Gayle’s articles regularly appear in the Sydney Morning Herald’s small business section and the Australian Financial Review’s special reports section.

The opinions expressed in this article are the opinions of the author(s) and not necessarily those of Homeloans Ltd.