Negative gearing has hit the headlines yet again - glancing at the newspapers you would not be blamed for believing that the RBA was advising to completely abolish negative gearing. Like many reports in the media, the headlines are full of spin and the true message is hidden in the detail.
The RBA 25 page submission to the Standing Committee on Economics about its Inquiry Into Home Ownership covered many things concerning housing other than negative gearing but for the sake of the headlines, this is the point we will discuss.
The benefits of negative gearing for the economy are recognised, the key one being that negative gearing has a positive effect in keeping rental priced down something that the government needs to keep firmly in mind when looking at housing.
A key point to note that when discussing negative gearing the RBA mentions that “other aspects of the tax system should be taken into account”. With this the RBA goes on to questioning two Howard era decisions -
1) In 1999 the government introduced a tax break off 50% on capital gains tax
2) the 2003 government decision that allowed super funds to borrow
Both these changes have had an effect on property investment as the RBA points out “since property can usually be purchased using higher leverage than other assets that produce capital gains, property is especially affected by this feature of the tax system.”
The general message from the RBA was that negative gearing should not be addressed “in isolation” and indicated there are areas around Capital Gains Tax and Super fund borrowing that needs further consideration.
The RBA continues to recognise the importance of deductions, stating: “The ability to deduct legitimate expenses incurred in the course of earning income is an important principle in Australia’s taxation system, and interest payments are no exception to this.” Treasurer Joe Hockey has repeated expressed his support for t
his is a point.
Philippe Brach is CEO of Multifocus Properties and Finance
Disclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property
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