Senate crossbenchers David Pocock and Jacqui Lambie are calling for the scaling back of negative gearing on investment properties.
It comes after Treasury revealed the popular tax deduction cost the Commonwealth tens of billions last year, and as the government is under pressure to rule out future negative gearing changes.
Pocock and Lambie rebuked politicians on both sides for taking advantage of negative gearing while owning multiple properties.
What is negative gearing?
Negative gearing is a financial strategy most commonly used for real estate investment.
Negative gearing promotes the borrowing of money to invest in an income-generating asset, such as a rental property, with the assumption that the costs associated with owning and maintaining the property will exceed the rental income generated.
Under negative gearing, a potential property investor:
- Borrows funds, usually through a mortgage, to purchase an investment property
- Various costs are incurred through the property – including mortgage interest, property management fees, insurance, maintenance and property taxes
- The property generates rental income from tenants occupying the space
- Negative gearing occurs when the total costs exceed rental income, resulting in a financial shortfall
- An investor can generally claim tax deductions on the losses incurred, reducing overall taxable income
- Investors can halve the capital gains tax payable on a property when it is sold if it is owned for at least 12 months.
What are the issues?
Supporters of negative gearing maintain the policy encourages investors to make properties available for rent.
Many Australians welcome the policy as an effective strategy for investing in property while minimising tax.
Opponents say negative gearing helps distort the property market, pitting investors against first-home buyers and driving up prices.
It is also seen as an inequitable taxation policy that favours more affluent Australians who already have the funds to buy one or more properties.
Treasury data shows aggregate rental property deductions will leap to $27.1 billion for 2023-24, up 58 per cent on 2020-21 ($17.1 billion).
Treasury did not release figures directly relating to exemptions for rental losses – or negative gearing – for the most recent year.
In 2021, 1.1 million investors reported losses of $7.8 billion and claimed a tax benefit of $2.7 billion.
Treasury figures for 2020-21 showed 80 per cent of tax reductions for rentals went to those earning above the median income, while 37 per cent was claimed by the top 10 per cent of earners.
Why is negative gearing making headlines?
After the federal government changed its stance on the controversial tax cuts, despite repeated pledges to maintain them in the form proposed by the then-Morrison government, the Opposition and some media have attempted to make the future of negative gearing a political issue.
Prime Minister Anthony Albanese and Treasurer Jim Chalmers have repeatedly been asked if the decision to alter the stage-three tax cuts opened the way for the removal of negative gearing.
Labor proposed limiting negative gearing to new properties in a policy released in 2016, as well as cutting the capital gains tax discount from 50 per cent to 25 per cent.
Bill Shorten took the policy to the ‘unloseable election’ in 2019, which was won by Scott Morrison.
Albanese dropped the policy when he became Labor leader later in 2019.
What they say
“There is a whole lot of analysis that says [negative gearing provisions] encourage investment in housing.
“We’re supportive of the current rules. We have not considered changes.”
“We’ve made it really clear that (changing negative gearing) is not something that we have considered or are considering.”
“I think the Prime Minister, after having promised it on a hundred occasions, we now have to test his credibility in relation to negative gearing and tax on the family home.”
“The gall of some of these politicians who have multiple investment properties to … say we cannot touch negative gearing and capital gains tax discounts.
“I think they have to be on the table if we want to turn this ship around and have housing as something that everyone in our community can afford and to not have housing where it’s arguably easier to buy your second house than it is your first house.”
“I understand you want investment [for retirement] and not just your super, but how many houses do you need to invest?
“I’ll just remind those people they can’t take that money when they’re 10 foot under.”