As first reported by Nine Entertainment newspapers on September 25, The Treasury (the national treasury and financial department of the federal government) has “started work on options to scale back negative gearing and capital gains tax concessions, preparing the ground for a bold new housing policy that could define the federal election”.
And this news has stirred up a long-running debate about whether or not negative gearing is a positive or negative thing.
Marty Fox, CEO and founder of luxury real estate brand WHITEFOX and judge on The Block, is clearly a fan and told The Weekly that The Treasury would be foolish to make any changes.
“The government must maintain stability, particularly among investors – if investors start to pull back then vacancy rights will tighten further. This would be a disastrous outcome for Australia’s property supply,” Marty said.
“By implementing short-sighted changes to negative gearing in order to address affordability, the unintended knock-on effect to rental availability will hurt investor confidence and therefore exacerbate the critical shortage Australia is facing.”
However, Max Chandler-Mather MP – who has long called for reform – has a completely different view.
“After pretending it was impossible, all of a sudden under pressure from the Greens, millions of renters finally have some hope, as Labor is actively considering changes to negative gearing and CGT,” Mr Chandler-Mather said.
“If Labor gets this right it could be light at the end of the tunnel for millions of renters who are losing hope they’ll ever be able to buy a home.”
But let’s take a step back for a second… What the heck is negative gearing anyway?
The Weekly have spoken to a few finance and property experts to answer any and all questions you may have…
What is negative gearing?
According to Grace Bacon, a partner with RSM Australia and a certified financial planner, “Negative gearing refers to the situation when investing in property or shares and the aggregate costs of owning the asset, such as loan interest, maintenance, and other expenses, exceed the investment income generated from the asset.
“This results in a financial loss for the investor. It is often associated with property ownership, but it can also be applied to share investing.
“However, this loss can be beneficial for investors because it can be used to reduce their taxable income. By deducting the loss from their overall income, they pay less tax. This strategy is popular among property investors as it may provide long term gains and provide some tax benefits along the way.”
Anthony Webb, Head of Victoria for Belle Property and Hockingstuart, gave a similar but simpler explanation and told us:
“Negative gearing occurs when the income generated by an asset, such as an investment property, is less than the expenses incurred, including interest from a loan. This money ‘lost’ can be claimed against your income or wages to reduce your taxable income.”
Is negative gearing still available in Australia?
Yes, negative gearing is still available in Australia.
It has been a part of the country’s tax system for decades and is a common strategy used by investors, particularly in the property market.
Currently, The Treasury is considering “scaling it back” but nothing concrete has happened yet.
What are some common misconceptions about negative gearing?
Grace told us that she frequently encounters the following four misconceptions around negative gearing:
- It’s only for the wealthy: “Many people think that negative gearing only benefits the wealthy. Any investor needs to have a sufficient level of taxable income to take advantage of the tax losses generated from negative gearing. A tax loss is still a loss if you cannot use it. You also need sufficient income to be able to meet loan repayments if there is no rental income should the property become vacant. It is more a question about your cash flow and whether you have the ability to be able to borrow funds to invest.”
- It’s a guaranteed profit: “Another misconception is that negative gearing guarantees a profit. In reality, it involves financial and market risk. The strategy relies on the property increasing in value over time to offset the initial losses. If the property value declines, investors could face significant losses. If the investor is unable to meet the shortfall in expenses associated with the property, then the investor will suffer losses.”
- It means an immediate tax refund: “Some believe that negative gearing provides an immediate tax refund. However, it actually reduces taxable income, which can lower the amount of tax owed at the end of the financial year. It’s not an instant cash refund.”
- It’s always beneficial: “People often think that negative gearing is always beneficial. While it can be a useful strategy, it’s not suitable for everyone. Investors need to consider their financial situation, risk tolerance, and investment timeframe and overall goals before deciding whether it is appropriate for them. They also should seek professional advice from a Financial Adviser and Tax Adviser.”
How does negative gearing influence property prices and housing affordability in Australia?
As a property and real estate expert who has 26 years of industry experience, Anthony says, “Wherever there is competition on a property you will see an increase in price, so if the property you are interested in also appeals to investors, then yes, you might see an increase in price. In my experience, investors are particularly sensitive to price and are not usually emotionally invested in properties, so will rarely pay more than market value.
“The other side to housing affordability is for renters who make up 36 percent of the population. In most states in Australia, we are seeing vacancy rates increase and rental prices stabilise.
“Negative gearing assists investors and I fear without it, we will see more sales, which will worsen the rental shortage and the prices will increase as a result.”
Whereas Grace says, “Negative gearing can influence the property market by increasing demand for investment properties, which can drive up prices and impact housing affordability.”
Who benefits most from negative gearing?
“Negative gearing is one of the common strategies used by investors to accumulate wealth outside of their primary residence and superannuation. It is beneficial for people who have surplus cash flow and have a high-risk tolerance and long-term horizon,” Grace says.
Anthony echoed Grace, saying, “There is the perception that it only benefits the wealthy. Clearly to buy a property you need to qualify for loans and have the money saved for stamp duty and other costs associated with buying a house, however, negative gearing is available for everyone.
“I would not have been able to enter the property market when I did without the ability to earn income from renting out my property and using negative gearing to offset some of my losses.”
Is negative gearing unfair?
Whether negative gearing is unfair is a matter of opinion and, as aforementioned, has been the subject of much debate in Australia.
Critics argue that it favours wealthier Australians and contributes to housing affordability issues by pushing up property prices.
Supporters, however, say it encourages investment in the housing market and provides rental housing.
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