Many worried investors have been asking me questions about the future of negative gearing, especially if Labor wins the next election. Although politicians are not always guided by common sense, there are many reasons why they should be careful when tinkering with it.
The statement we most often hear is that negative gearing benefits the rich, but let’s take a closer look. According to the ATO there are approximately 13 million individual taxpayers, of whom about 2 million (15.4%) own one or more investment properties. Of these 2 million property investors, 1.5 million own one property and only about 80,000 own more than four properties. So negative gearing does not primarily benefit the wealthy; instead, it helps ordinary people supplement their superannuation.
Materiality for government budgeting
By allowing negative gearing on investment properties, the government forgoes about $3 billion in taxes every year. Compare this to other taxes forgone by the government:
1. Superannuation concessional taxation: $36 billion
2. Capital gains exemption on owner-occupier property: $34 billion
3. GST on uncooked and unprepared food: $7 billion
The $3 billion forgone because of negative gearing is further reduced by the fact that, for every dollar of interest deduction claimed, there is a corresponding dollar of taxable income for the banks. As a result, the government is only marginally impacted by this tax concession as interest is by far the biggest deduction claimed.
In addition, the government collects $10 billion a year in capital gains, which is only paid by investors (owner occupiers are exempt). So, is it worth even thinking about getting rid of negative gearing?
Effect on the economy
Back in 1985, a time when the economy was already fragile, when the Hawke government removed negative gearing economic chaos followed quickly. The very same government that removed it reinstated it eighteen months later. Given the reluctance of politicians to ever back down on their policies, it was a clear admission that it had been a major mistake! This lesson from history should provide ample warning for the future.
Also, there has been quite a bit of media coverage about negative gearing pushing property prices up, but there is no evidence of it. Investors do not tend to buy on impulse, unlike owner occupiers who have an emotional involvement in the decision making and represent 70% of the market.
Understanding the numbers
In countries where negative gearing does not exist, properties tend to have higher yields or lower expenses so that the return to investors remains reasonable. No one in their right mind would invest in a venture that did not provide market returns. In Australia, negative gearing is part and parcel of the equation and, if it is removed, the only logical outcome would be that investors will have to raise rent to compensate or simply sell. In effect property prices would decline and construction of new dwellings would slow down dramatically, creating a huge economic downturn as the construction industry in Australia employs a sizeable workforce.
Tinkering with negative gearing will have only downsides for everyone: the supply of properties will reduce, rents will go up, and unemployment numbers will rise and create a downward spiral such as the one that rocked Australia last time a government removed it. Property investment is an effective tool that helps 2 million mostly ordinary Australians bolster their retirement income and, at the same time, provides much needed rental accommodation that the government does not need to supply.
Philippe Brach is CEO of Multifocus Properties and Finance.
Philippe is an experienced property investment specialist, mortgage broker and author of ‘Creating Property Wealth in any Market’.
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Disclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property