Negative Gearing in Australia


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  1. What is Negative Gearing ?
  2. Why can’t Negative Gearing be abolished ?
  3. What happened when Negative Gearing was abolished in 1985 ?
  4. Does Negative Gearing really cost the government money ?

A few questions above that are often asked, and answered with various replies depending on the political and economic leaning of the person answering.

What is Negative Gearing ?

A negatively geared investment propery is one where the cost of the property exceeds the income.

What happened when Negative Gearing was abolished in 1985 ?

The Australian treasurer, Paul Keating, abolished new Negative Gearing claims in July 1985, but by September 1987 he decided to re-instate it.


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Why ?

Does Negative Gearing really cost the government money ?

Some people say it costs billions, but it actually doesn’t, it only delays the collection of some of the taxes.

  • The system with negative gearing allows any losses to be offset against other income that the person has in that tax year.
  • The system without Negative Gearing would delay offsetting that loss until the investors property portfolio is producing its own profits.

The loss is still claimed eventually, it does not dissapear.

An article in the AGE newspaper, in April 2009 started with:

NEGATIVE gearing is disappearing as a tax strategy for landlords, and it seems it won’t be missed.

Falling interest rates and rising rents over the course of the financial crisis have made it increasingly hard for landlords to make deliberate losses to offset their other income for tax purposes, and the Government’s Henry Review has the practice under the microscope.

and went on to include the following:

In the in-depth telephone and face-to-face interviews with 20 to 40 landlords, from each Australian state, only one of the investors interviewed nominated negative gearing as the chief reason for deciding to become a landlord.

In July 1985 the Hawke/Keating government quarantined negative gearing interest expenses (on new transactions), so interest could only be claimed against rental income, not other income. (Any excess could be carried forward for use in later years.)

In September 1987, the same government restored the previous negative gearing rules.

There are many arguments WHY, it was reversed.

In 2008-09 Australia delayed an income of $4.6 billion by negative gearing.
Taxation Office figures show that in 2008-09 there were 2,351 million personal taxpayers who claimed loan interest expenses of $18.90 billion relating to their property expenses on rental income properties. 4.6b is about 24% of the total. This must mean that about 76% is positively geared.

www.futuretax.gov.au

According to one website, Australia had 1,811,174 property investors in 2010-11. Of those, 1,213,597 made losses totalling $13.285 billion.

One suggestion that seems to make sense:

Leave Negative Gearing on ALL existing properties, so as not to “rock the boat” again.
Only allow Negative Gearing on NEW HOUSES, so that more new housing might be built.

I personally feel that this option has merit.

More:

The Bank of America economist, Saul Eslake, is quoted as saying I have to translate the words ??negative gearing’ to people overseas because it just sounds crazy to have a system that rewards people for losing money. ?

However, all businesses are able to offset their losses against income at some stage, even in America. The only difference is that with property, you can offset it against your other taxable income, rather than wait to offset it against your property when you sell the property.

With negative gearing, all your claimed losses are added back to your sale price when you sell, and tax is paid then. eg:

  • Buy house for $300,000.
  • Claim $50,000 in losses over your period of ownership, set against your other income.
  • Sell for $350,000
  • You made a profit of $50,000
  • BUT, you get taxed on $100,000 ie: The $50,000 actual profit PLUS the $50,000 in previous claims that you have negatively geared.

The idea for ALL property investors IS to make profits eventually. They do NOT get ALL of their losses back in tax, so would be stupid to try to rely on Negative Gearing for a constant income.

eg:

If a property owner loses $1,000 during the year, he only gets about $300 back. They still lose $700. Not exactly a reward for losing money! They make their main profits once the rental incomes rise, and they begin paying tax on profits, AND when they sell the property, and pay tax on the capital profit PLUS the negatively geared losses.

 

An example that I have worked on, and which I think is correct. I am happy to be corrected if I am wrong.

Buy Property for $300,000
Sell property after 10 years for $600,000
Capital Gain = $300,000
Claim $9,000 per year in Expenses as Negative Gearing for 10 years
Tax Refunds received over 10 years (at 32.5% tax) $29,250
CAPITAL GAINS AT 50% DISCOUNT
Without Negative Gearing
$ 300,000 Profit on sale
$ 90,000 Less Unclaimed Expences
$ 210,000 Net Profit
$ 105,000 CGT Discount
$ 105,000 NET Capital Gain
$ 60,000 Salary
$ 165,000 Total Taxable
$ 48,997 Total Tax in Year 10
$ – Tax Refunded over 10 Years
$ 48,997 NET TAX
With Negative Gearing
$ 300,000 Profit on sale
$ – Less Unclaimed Expences
$ 300,000 Net Profit
$ 150,000 CGT Discount
$ 150,000 NET Capital Gain
$ 60,000 Salary
$ 210,000 Total Taxable
$ 68,047 Total Tax in Year 10
$ 29,250 Tax Refunded over 10 Years
$ 38,797 NET TAX

The Net result is that using Negative Gearing gives an extra $10,000 in tax benefits over 10 years, using this one example. $1,000 per year.

However, IF the government removes the 50% Capital Gains Discount, these figures would change to:

  • $ 95,047 Net Tax Without Negative Gearing
  • $106,297 Net Tax With Negative Gearing

Things would change for the worse for those that use Negative Gearing, as they may actually be taking a big gamble, on that Tax Discount not being removed.

Which is easier to remove: Negative Gearing or the Capital Gains Discount ?


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