Should Negative Gearing Be Abolished?

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Once again we have seen some commentators pushing for the abolition of negative gearing.

 

The claim is that the government has lost some $13 billion dollars of revenue by allowing tax breaks through negative gearing to the “so called Rich”.

 

As the government is trying to find savings to get the budget back in the black they have been criticized for asking the “Poor” to shoulder most of the budget cuts through “GP Co payments”, loss of “family rebates”, higher “university fees”, etc, etc, whilst so called “rich” property investors are getting away with generous tax breaks through negative gearing.

 

THIS IS SIMPLY MISREPRESENTING THE FACTS.

Whilst taxpayers have claimed a total of $13 billion in losses in their tax returns the actual revenue forgone by the government is calculated at their individual tax rates.

Thus at an average tax rate of 35% the lost revenue is only $4.5 billion.

So the government has not lost $13 billion dollars by allowing negative gearing but rather $4.5 billion is the actual dollars forgone.

Public housing provided by the government only accounts for around 4% of investment properties. The other 96% of housing is provided by the private investor.

Should they disincentivise property investment by removing negative gearing we would see the government having to shoulder the weight of providing a much larger percentage of housing for tenants.

This would in effect cost the government much more than the $4.5 billion dollars a year in revenue forgone due to negative gearing.

In fact it would cost the government in the hundreds of billions to provide public housing.

You may recall that the Keating government attempted to remove negative gearing in the eighties but reversed their decision when the queues for public housing doubled.

Secondly there are around 1.6 million property investors in Australia and most of them are not so called “rich”.

In fact most property investors only own one property and fall into the category of middle class. They certainly are Not considered “rich”.

In fact they should be applauded for the sacrifice to their lifestyle (due to the shortfall created by negative gearing) as they attempt to invest for their future and in so doing, reducing the government’s burden in providing them an old age pension when they retire.

In addition they save the government billions of dollars in not having to provide public housing for those unable to buy their own homes currently.

Not to mention the knock on effect to the economy that property investors produce.

 

HOWEVER NEGATIVE GEARING IS ONLY ONE PIECE OF THE JIGSAW PUZZLE…

When it comes to the property market, many other factors such as jobs, interest rates, confidence, supply etc. have far greater effect on the property market than negative gearing.

We need to have a growing economy which leads to increased revenues for the government as businesses do well and able to hire more people and with more jobs, our standard of living is improved. This will ensure the property market is stable and will continue to grow steadily.

Supply is a very important factor as successive governments have not provided the policies to generate more supply in past years.

 

As our mining industry transitions from “Construction” to “Production” and slows down, we need to fire up the Non Mining sectors of our economy to keep the GDP growth rate at around 2% to 3%.

 

At a GDP growth rate of 2% to 3% we can keep unemployment down at around 5% which some Economists consider as close to full employment.

 

A GPD growth rate below 2% to 3% will see unemployment rise.

 

Predominantly the property industry represents a huge part of our economy. The knock on effect of a growing property market is huge.

 

For those advocating abolishing negative gearing at this particular time of the transition phase where we need the property industry to fire up economic growth, demonstrates an ignorance around basic economics.

 

No, let me put that a little bit stronger.

It demonstrates a lack of common sense.

 

Ed Chan

Non Executive Chairman and Founder of Chan & Naylor Property Accountants

www.chan-naylor.com.au

Ed Chan

Disclaimer: This article contains general information. Before you make any financial or investment decision you should seek professional advice to take into account your individual objectives, financial situation and individual needs.

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