📷Australian governments across the political hues see no need to touch negative gearing.
It is a mechanism that exists within the fundamentals of Australia’s tax system anyway — a deductibility of interest on borrowings made to undertake an investment. It is nothing more than a specific case of the general principle that the expenses incurred in generating income are deductible.
And yet one reason that the debate on negative gearing regime will not go away, especially in relation to the abolition or retention of its use for investment property, is the cost of this concession to the government’s bottom line.
A recent blog post of the Federal Parliamentary Library (its blog is called FlagPost) touches upon the topic, with the Parliamentary Library compiling estimates of the cost to the bottom line, from a range of sources, and the drain on the government’s coffers that negative gearing represents.
The blog notes that these reported estimates vary based on methodology and the relevant asset class focus (some reports look at residential property only, while others look at negative gearing across the asset spectrum). The blog also notes the time frame of each report may also influence conclusions, as the sources range from 2006 to 2015.
You can read each estimate report by downloading them from this page (scroll down to the table). In preparation for a Greens paper on reforming negative gearing, for example, the Parliamentary Budget Office (PBO) was requested to provide a costing on removing negative gearing for all asset classes bought since July 1, 2015 (existing investments to have the treatment grandfathered).
The PBO estimated this reform (which had some admittedly particular features) would boost government revenue by $2.94 billion out to 2017-18. And out to 2024-25, the extra revenue was estimated to be $42.5 billion.
An Australia Institute report used data commissioned from the National Centre for Social and Economic Modelling (NATSEM), which figured that the cost to taxpayers came in at $7.7 billion a year, although this included the CGT discount (which is not limited to negatively geared assets). For negatively geared residential property investments alone, NATSEM’s estimate was that tax revenue missed out on would total $3.7 billion a year.
From all the reports studied and linked to in its blog, the Parliamentary Library team says it was able to glean that the likely impact on Australia’s budget is greater than $2 billion a year.
As can be seen, the CGT discount is seen by many to be part-and-parcel of the negative gearing problem. The income tax benefit can be triggered just one year after the property is owned and making an on-going revenue loss as outgoings, mainly interest, exceed the rental income. The benefit in effect is propping up an investment along the way until the almost certain probability that the investor makes a capital gain at the end of the period of ownership. In other words, the negatively geared property operates at a loss (thereby earning the investor valuable tax deductions) with the assumption that the real return in the end will come when the property is sold.
From the taxpayers point of view, Taxpayers Australia’s submission to the government’s Re:think tax white paper (download it here, see page 38) included the results of a survey of members, which confirmed that negative gearing continues to be a contentious issue in the context of real estate. Scant few members (2%) supported the proposition that the CGT discount should not be available to offset a capital gain on the sale of a negatively geared property.
A significant 42% of members felt that nothing need be changed with the incumbent system, although 24% held that one valuable change would be to quarantine negative geared losses from an investment property to be only applied to future income derived from investment property. This is similar to the system in New Zealand.
Furthermore, where negative gearing is disallowed for real estate investments, then as a general principle it should also be disallowed for any negatively geared investment, in any asset type such as shares. While there is still a need for the CGT discount to apply to asset holdings, there is a case for offering a greater incentive for holding the asset in the longer term.
Discussions on the future fate of the negative gearing regime are far from over. It will be interesting to see if any reform comes out of this government’s Re:think white paper, or indeed if future governments, spurred on to stop the consolidated revenue deficit, act with some decisiveness to touch any aspect of this tax benefit. In other words, watch this space.
Further reading: Tax concessions; is criticism justified or overblown?
# [negative gearing], [property investment], [tax breaks]
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