It seems to pop up every election cycle but this time the topic of negative gearing
It seems to pop up every election cycle but this time the topic of negative gearing has come up early, with the Federal Government flagging potential changes to a scheme that has supported housing supply in Australia for over 30 years.
As a quick refresher, negative gearing is a tax mechanism whereby property investors can claim certain costs of owning that investment against their taxable income. This reduces their overall tax payable and essentially subsidises the holding costs of that property for the investor.
Not every expense is claimable, but of those that are, the big ones are maintenance and management costs, depreciation (claiming for the reduced value of a building and improvements which degrade with age) and of course, interest payable on an investment loan - typically the largest single expense.
Importantly, the current incarnation of the system allows for expenses on the property to be offset against any other income for that owner, including rental income, wages and salary. This allows investors to then hold property without having to “fill the gap” between holding costs and rental income, which could otherwise be tens of thousands of dollars a year, particularly in the current interest rate environment. Over time the property is paid off, rents and values rise and negative gearing has less impact, but early on its a very big piece of the puzzle.
The argument against negative gearing is that it promotes price growth as people are able to invest more in property than they might otherwise, and this makes it more expensive for owner occupiers and tenants alike. The problem with that is that absent this kind of system, given the costs of housing (and particularly new housing) it would take property investment out of reach of the vast majority of mum and dad style investors, concentrating wealth and control in an even smaller pool. It would also reduce the overall housing supply as investors look elsewhere for affordability and a return. A typical new home in cairns is between $650,000-$700,000. An 80% loan at 6% costs $31,000+ a year in interest alone, before any other costs are considered. Even with today's rents, you might still be going backwards before tax kicks in.
There is absolutely room for improvement in our housing market. But turning it upside down is a a hard way to start….
Maybe we can try encouraging more investment instead? Maybe?