Negative Gearing what’s all the fuss about?
Negative Gearing whats all the fuss about?
If you are living in Australia at the moment then you could hardly have missed the political and media beat-up surrounding the negative gearing debate. For the uninitiated, it seems negative gearing is getting a terrible rap and one that allegedly favours the rich and creates inequality for the average tax payer. The media has blamed negative gearing for various problems including high property prices, keeping first-time home buyers out of the property market, tax rorts and causing budget deficits.
Depending on who you speak to in the industry there seems to be a lot of hype around, problem being, is that the hype is largely driven by those who just don’t understand the deeper issues.
I would like to share my view as one of many ‘mum and dad’ property investors out there in Australia right now. I believe property investing is a real and effective method for bolstering the savings of middle-class Australians. Australians that if we don’t do something now , knowing that there will be no pension for me to live on in retirement, I am certainly not sitting around to wait for any handouts as I know I will not qualify. Nor should I.
So, what is negative gearing and why do I believe it should remain?
What is Negative Gearing?
Negative gearing is a tax arrangement that allows you to offset losses incurred through your investment property ownership against your taxable income.
An example of this is:
You own an investment property that generates $13 000 per annum gross rent to you (approximate $250 week rent).
As the landlord, there are costs to you for owning that property, and let’s say they could total
$16 000 per annum. These costs are such things as landlord insurance, maintenance and gardening, interest payments to the bank on your loan, property management, depreciation on fixtures and fittings etc.
So you minus what it has cost you $16 000 by the amount of your investment income $13 000. Hence you have made a loss of $3 000 for that financial year.
Negative Gearing is a tax arrangement that allows you to offset that $3 000 loss against any other income you receive. So if your annual salary is $80 000 per annum, you can claim a $3 000 deduction against this $80 000, and only pay tax on $77 000 (ignoring any other tax deductions you may have also).
This tax-offset arrangement is available until the property becomes positively geared. This means when your income from your investment property is generating a higher income than what it costs you to hold it. From then on when the property becomes positively geared, you’ll pay tax on all of the income the property generates.
Some of the points the political and media beat-up are saying about why negative gearing is a bad thing?
Apparently negative gearing is unfair. These are just a few of the arguments circulating to this effect, including:
- offsetting the loss against tax means less fortunate tax payers are helping to pay for the “wealthier half” to own an investment property
- it unfairly favour’s the rich because billionaires can negatively gear the same way as average earners
- it pushes up house prices because investors are buying-up housing stock for the tax benefits
- the government loses out on tax revenue it would have received had the investor paid tax on all income.
Check out the link above for further information on exactly who claimed negative gearing tax refunds in the 2015 financial year.
So ready to crack open the above arguments??
- Negative gearing is not an investment strategy, per’se. Why would any sane person enter a business deal to lose money? The answer is because you hope that, over time, your losses will be made up by the capital growth in the value of the asset. This capital growth can then be used to refinance, or to realise a capital gain when the asset is sold. Negative gearing only makes sense from an investment point of view if the property value increases over time.
- The same rules apply to the rich as to the less wealthy, however, two-thirds of Australia’s two million property owners negatively gear ( see above list in link)Of these, 70% earn less than $80k per year. The tax benefits of negative gearing have allowed many ordinary, working class Australians, to invest in property and take control of their financial future. Given our ageing population and the government’s propensity toward self-funded retirements, (exactly my position) then you could argue this can only be a good thing long-term, right?
- According to some, the theory that negative gearing pushes up housing prices is just pure BS. In some overseas countries where negative gearing is not allowed, they’ve experienced a boom, and much greater subsequent bust, than Australia has gone through. To me, it seems lobbyists don’t recognise that borrowing money to undertake productive investment moving forward helps economic growth.
- Finally, does the government lose out? Not really. A property may start out with a large loan and low rent (negative gearing). Over time, the loan decreases and the rent increases (positive gearing), then the Tax Office gets its share. Additionally, every dollar claimed as a deduction was paid out by the investor post tax (in their hand) to pay for the property maintenance for example. Don’t forget too that for every dollar spent you do not get back $1 for $1 but the percentage in the $ of your taxable income rate, hence getting a little slack from the government for the initial startup of a property in negative gearing should in my opinion stay.