Anyone with the slightest interest in investment property strategies and asset protection will be aware of the debate raging in the media lately regarding negative gearing.
Opponents of negative gearing argue that its removal will save the Government billions of dollars a year in tax concessions, while proponents say that removing it will have a substantial impact on housing prices and rentals.
How negative gearing works
Negative gearing essentially refers to making a loss on a property investment, which in turn provides investors with the ability to reduce their tax liabilities. This may be worthwhile for some investors, providing the property in question has good potential for capital growth – which would be realised upon its sale.
Not all investors benefit from negative gearing, however. Some may for instance stand to gain more from having a positively geared property that provides them with a passive income stream. Also, for those in the lower tax brackets, negative gearing is likely to provide only a modest advantage at best.
There is also some belief that positively geared properties invariably have lower capital growth potential, but this is not necessarily the case according to some commentators. This is because it depends on the characteristics of the property in question – such as its location or proximity to a capital city.
In the section below we have outlined some of the detail of the arguments for and against negative gearing.
The argument for keeping negative gearing
Those in favour of keeping negative gearing argue the following:
- It improves the housing supply by encouraging investment.
- It keeps down the cost of rent, due to greater rental property availability.
- It provides opportunities for Australian citizens to build wealth for themselves, their families, and their retirement.
- Removing negative gearing will push up rents due to lower housing supply and greater competition for properties.
Removing it will also lower house prices, causing a loss to investors and home owners.
The argument for removing negative gearing
The Opposition and some commentators – including the Grattan Institute – are in favour of making negative gearing reforms. Some of the arguments include:
- The deliberate loss-making nature of negative gearing leads to investment distortion.
- Negative gearing adds inflationary pressures to housing markets.
- It favours wealthy investors at the cost of home buyers.
- The ability to write-off interest encourages and leads to higher levels of household debt.
- There is no way of linking who gets the subsidy to which property or which tenants. In that sense we have no way of measuring whether low-income tenants benefit in any way.
There are a number of alternative models being proposed. These include:
- Providing tax credits for investment in social housing.
- Restricting negative gearing to new housing only.
- Providing the negative gearing subsidy to landlords who provide housing for disadvantaged tenant groups.
- Using the money saved from removing negative gearing to build more social housing, or to provide rental vouchers which landlords could ‘cash in’ as tax concessions.
Australian independent ‘think tank’ the Grattan Institute is in favour of reforms to negative gearing. It states that removing it will reduce house prices by only up to 2%, and will lead to a considerable increase in Government revenues. The Institute recommends reducing the capital gains tax discount from 50% to 25% and abolishing negative gearing. It states that “contrary to urban myth, rents won’t change much, nor will housing markets collapse”.
Opinion is certainly divided over this issue, and only time will tell what will happen. In the meantime however, it appears that negative gearing will remain in place – at least until the topic comes up next time!
If you are interested in investing in property, we recommend first speaking to a property tax accountant for professional advice before making your decision.
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. Click for more detail regarding this disclaimer.