Negative Gearing: The Good and the Bad
Since 1996, Negative Gearing has been in place and for very good reason. However, there has been a lot of recent talk about negative gearing and the debate about whether or not this should be abolished.
Negative gearing, put in simple terms is when your outgoings are more than your incomings after all tax deductions have been claimed. For example, you rent out your property for $500 per month, but your mortgage repayments cost you $600 per month. This means you have a shortfall of $100 per month that you have to pay out of your own pocket. This $100 can be claimed as a loss when completing your tax return, and is popular with high income earners to help reduce their taxable income.
It is important to remember that negative gearing should be a paper expense rather than a pocket expense and properties at the end of the day should produce a positive cash flow. “On paper” basically refers to depreciation claims which can be claimed back through your tax return and you physically shouldn’t be forking out money from your pocket to cover the shortfall.
The main driving force to own a negatively geared property is for the tax benefits and to ultimately save tax. It really does favour the wealthy on a tax bracket of 30% compared to those on a lower tax bracket who are earning less as there is more tax to save.
So although negative gearing favours the wealthy, is anyone else utilising it? According to statistics from the ATO, 883,325 of the 1.266 million taxpayers claimed benefits from negative gearing who earned less than $80,000 in 2011-12. The majority of these people had job roles including teachers, salespeople, nurses; clerical and emergency workers.
The statistics also showed that 73% of Australians utilising negative gearing only owned one property, whilst 18% owned two.
These types of people tend to be your average mums and dads who don’t have faith in the government and believe that they should secure their own retirement future instead.
So with more people turning to negative gearing, what impact is this having on the Australian property market? Negative gearing has reduced housing supply and 92% of investors are chasing the capital gains associated with established housing rather than looking to invest in new and off the plan developments.
It has also had an impact on the price of housing, where housing prices have increased and the gap between price and yield has broadened. This therefore has a knock on effect in rising rents putting more strain on first home buyers who are finding it increasingly more difficult to get their foot on the property ladder.
The Australian government loses billions of lost tax revenue each year through negative gearing, and approximately 1.25 million taxpayers have at least one property that is negatively geared.
So what would happen if negative gearing was scrapped? It is thought that the number of people looking for rentals will start to decline due to the increase in rental prices. This would then have a knock-on effect on jobs with fewer jobs available in the economy.
There would also be a lower demand in public housing due to the reduction in building approvals occurring over the last few years.
For now, if you are a property investor and looking to make your money work hard for you then owning a negatively geared property is the way to go, especially if you are someone on a higher income and high tax bracket looking to produce a positive cash flow. There are also a lot more negatively geared properties out there compared to positively geared properties to choose from. We will just have to wait and see what happens.
Published on 25th of November 2014 by Marty Stanowich