Negative gearing has become all pervasive in Australia for property investors, and Associate Professor Dale Boccabella from UNSW’s Business School suggests that now is the time to take action while the property market is so hot.
The Reserve Bank of Australia is meeting today to decide on interest rates. It has recently given a series of warnings about house prices to take some heat out of the property market. Some commentators blame negative gearing for allowing tax breaks for property investors, which gives a boost to housing investment, and hence prices.
“Considerable momentum is gathering against the continuation of negative gearing for property investors,” he said. “Our public finance framework ought to be internally consistent so that similar things are treated in a similar manner for income tax. And it is quite clear that with property, this isn’t the case.”
In its Stability Review released last week, the RBA pointed out that demand by investors means that investor housing loans now account for about 40 per cent of all home loans.
“Allowing negative gearing losses on passive investments to be used as a deduction against other income is a major assault on the fairness of Australia's tax system,” he said. “The assault on equity is compounded by the fact that Australia's capital gains tax only taxes half the gain made on the sale of assets when held by individuals, and through trusts, for 12 months or more - so called discount capital gains. The unfairness is further compounded by the fact that Australia's tax system only taxes capital gains when the asset is sold. Although I feel it would be hard to implement a capital gains tax that taxes gains before the point of sale”
With negative gearing an investor borrows money to invest but the gross income generated is less than the cost of running it, including interest on the mortgage. The investment therefore generates a negative cash flow – and that count’s against tax. The use of this in Australia, where people typically buy a property to rent, and where the mortgage cost is less than the rent income, is a useful way to reduce individual’s personal tax bills. Figures show it reduces income tax revenue in Australia by $13bn a year.
Mr Boccabella said. “You can see how significant this is; its use has risen dramatically in a decade. For example in 2001 it was just $600 million.”
Dale Boccabella said “housing tax reform means the government must make some hard decisions. Now is the time to grasp the tax nettle with strong gloves, reduce complexity in the tax system, and stop the current differential treatment.”
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