Negative gearing and who uses it and benefits from it has been the topic of fierce debate in the recently-held election. What is Negative Gearing? Negative gearing is where the cost of holding the investment is greater than the income you receive and that loss can be offset against your other taxable income. You receive a tax deduction for the amount of money lost on this investment during the financial year. Negative gearing is a tax concession that was designed to help investors enter the property market, but has been criticised by some commentators for giving a tax cut to already-wealthy investors.
Who is actually using negative gearing?
Unsurprisingly, figures on who uses negative gearing have been used selectively by each political party to support their cause. The current Federal Government has argued that negative gearing largely benefits average Australians and has glossed over treasury modelling which says that more than half the negative gearing benefits go to the top 20% of incomes, while the bottom 20% of earners are receiving 5% of benefits.
Taxation data from the ATO for the 2012-2013 financial year shows those making the most and highest losses on rental properties are teachers, clerical staff and salespeople. The industries where the highest percentage of workers used negative gearing were emergency services (including police) and defence. 22% of workers in these industries had an investment property and 90% of their investors declared a net rental loss.
According to the RBA, about half of all property investors have a household income under $100,000. They are also quite young, with 30% under 40 years old, and 60% under 50 years old. These figures may show negative gearing isn’t exclusively helping the old-and-wealthy to buy more investment properties, as many people fear – but also probably indicates that there are simply a lot more people in these income levels and job classifications.
ATO TAX RETURN BREAKDOWN
|Number who filed a tax return||% of all taxpayers||Number who use negative gearing||% who use negative gearing in each category|
|All taxpayers||12.78 million||100%||1.26 million||10%|
|Taxable income below $80,000||10.41 million||82%||838,675||8%|
|Taxable income above $80,000||2.37 million||18%||421,850||18%|
|Nurses and midwives||302,190||2.4%||37,165||12%|
SOURCE: ATO tax statistics, individual tables, *includes school principals, early childhood, primary, secondary and other school teachers
Who is negative gearing for?
Negative gearing is designed to give all income earners the chance to invest in property assets in order to give themselves some financial security. Even though the Government tells us most people who negatively gear have a taxable income below $80,000, the fact is that negative gearing is a tax deduction that works to reduce someone’s taxable income. However, the strategy remains a viable way for investors to get a foot hold in the property market.
Why the political interference?
Boosting the budget, making property easier to buy, and supposedly giving ordinary people the same advantage as “fat cats” were the sentiments behind the political brouhaha we saw before the recent election. Labor proposed restricting negative gearing to new homes, and halving the capital gains tax concession to 25%. The Liberals wouldn’t have a bar of it and vowed not to touch either negative gearing or capital gains tax.
The Australian Prudential Regulatory Authority (APRA) has taken steps of its own to cool the housing market, particularly in Sydney and Melbourne. It has called for banks to hold a larger buffer against their mortgage books, as well as reduce investor lending growth to 10% per annum. This has had the effect of making investor loans more difficult, but not impossible, to get.
Can you afford to buy an investment property?
Be sure to use our CANSTAR Mortgage Repayments Calculator and Borrowing Power Calculator before deciding whether you can afford to buy an investment property. You can also compare home loans on CANSTAR’s website.
Once you’ve decided you can afford to invest, you should take a look at the ATO’s information for individuals about tax obligations and investing in a residential rental property.
The ATO also has a helpful video series about investing in rental properties.