(even though the government doesn’t want you to)
Published by Catalogue Magazine 29/07/16
Do the words ‘negative gearing’ strike fear and/or confusion into your heart? Yeah, same. This is mostly because I am in denial about anything to do with tax, but also because the concept seems too complex to be summed up by any three word political slogan. Despite my resistance, negative gearing has become one of the biggest economic issues of this election campaign. It is also an issue that especially relates to young people, so we should all be paying attention.
People hoping to buy their first home are adversely affected by negative gearing. For a start, negative gearing disproportionately benefits wealthier households because it allows a tax concession for those that borrow money to buy investment properties. Here’s how it works: If the interest an investor is paying on a loan is more than the income they are earning from renting out that investment property, that loss can then be deducted from their taxable income, reducing the amount of tax paid in a certain period.
While this may sound like a terrible idea, because it means the investors are making a loss, it is assumed that the growth in the value of the house will be enough to make back that loss and more when the house is sold. In this way, the investor will gain capital from the difference between what they paid for the house and what they sold it for. Another factor is that since 1999 there has been a 50 per cent discount on the rate of tax on capital gains, which is like the icing on top of this tax-minimising cake.
As a millennial with no ambition, I obviously do not see myself ever being able to afford to buy one house, let alone an investment property or seven. I would rather spend my money on short-term goals like getting the film from my disposable camera developed and going out for brunch. But hypothetically, if government policy on negative gearing was changed, I would be more likely to consider buying a house as a possibility.
From a basic supply and demand perspective, negative gearing drives up property prices, as more investors are able to enter the housing market. Low interest rates in recent years have further encouraged borrowing and created a situation where average house prices in Australia are more than 10 times average annual income, compared to three or four times annual income when my parents were buying their first house.
Negative gearing can be taken advantage of by so called mum and dad investors, but a report by independent think tank the Grattan Institute found that the top 10 per cent of earners collect nearly 50 per cent of negative gearing tax deductions. So probably not just your average mums and dads. Overall, only about 10 per cent of taxpayers benefit from negative gearing, regardless of income level, meaning that the other 90 per cent are effectively subsidising investment properties, and there are a lot of other things I would rather my taxes be used for.
The Reserve Bank of Australia and many economists are in agreement that changes to negative gearing and capital gains tax would reduce volatility in the housing market. Less people borrowing money they don’t have to invest in overpriced property can only be a good thing for stability. Similarly, reducing the incentive to invest in property would remove distortion from the market and encourage investment in other, more productive assets. Of course, these changes would not fix all of Australia’s property market problems, but would definitely be a step in the right direction and acknowledge that we need to pursue other methods of increasing housing supply.
The Grattan Institute suggests removing negative gearing and reducing capital gains tax for everyone, including existing investors, and phasing this policy in equally over 10 years. Unsurprisingly, that is unlikely to happen. The Labor Party is campaigning on a proposal to change negative gearing for future investments. Labor is promising to limit negative gearing to new houses and they will also halve the capital gains tax discount to 25 per cent. The Greens have announced they will to remove negative gearing for future investments and phase out capital gains tax. The Liberal Party has stated they will make no changes to the current system.
Negative gearing was designed to increase the ability of Australians to own their own home. However, like many other policies, it fails to take into account the needs of young people and those who are financially disadvantaged and instead reinforces existing inequality. And inequality is something I really care about, even if that means learning about boring tax stuff.
Image: Tavi, our favourite millennial representative, lounging around and renting. Image Source