Changes to negative gearing puts growth at risk

Negative gearing has improbably become the tax measure most likely to be reformed in the upcoming federal budget.

And possibly the only tax reform to occur at the federal level for the indefinite future (unless you count modest cuts to income tax as a structural change to the tax system).

Not many of us saw this coming. With GST, company tax and stamp duty dominating the tax mix switch debate for 12 months, Labor’s announcement last weekend that it would abolish negative gearing on established homes from July 2017 (as well as effectively double the capital gains tax payable on investment properties) came out of left field.

And while the government was quick to rubbish the proposed changes, the Treasurer indicated he is actively considering negative gearing reforms of his own – to rein in what he calls “excesses or abuses” of the system.

Not quite bipartisan reform then, but more meeting of minds than we have seen on any other tax topic.

So what will be the affects of winding back negative gearing?

Gearing is of course where the total costs of owning a home (interest, land tax, rates, repairs and so on) in a financial year are higher than the rent received. It entitles the owner to a net deduction from taxes they would otherwise have to pay on earnings and other investments.

Like any deduction, those in the highest tax bracket save the most tax. And yet, ATO figures show that two thirds of property investors across Australia who negatively gear earn a taxable income of less than $80,000 a year. This includes 53,800 teachers, 52,000 retail workers, 35,900 nurses and midwives, 22,600 hospitality workers and 10,400 emergency service workers.

Now, of course, $80,000 is the taxable income of these Australians, after deductions from investment properties and work-related expenses have already been made, as Chris Bowen has pointed out. In other words, the gross income of these people was higher than $80,000 before the tax deduction was applied.

And yet the average loss claimed by Australians who own an investment property is $9500 a year, which doesn’t bump up the gross earnings of the average negative gearer into a much higher tax bracket.

There are only so many ways to reduce the costs of property ownership, if negative gearing is wound back. The easiest – and most likely – way is for investors to increase rents. Not a very effective affordable housing policy in that case.

First published on Domain.com.au, 20 February 2016.