Negative Gearing is a tax deduction that allows investors to offset losses from their investment properties against their other income, such as wages or salary. This can be done even if the property does not generate enough rental income to cover the costs of ownership, such as mortgage interest, property taxes, and insurance.
Negative Gearing has been a part of the Australian tax system since the 1930s. It was originally introduced as a way to encourage investment in property during the Great Depression. However, it has become increasingly controversial in recent years, as housing prices have risen sharply.
How does Negative Gearing work in Australia?
Negative Gearing works by allowing investors to deduct their losses from their investment properties against their income outside of the investment. For example, if an investor has a rental property that generates $10,000 in rental income but costs $15,000 in expenses, they would have a net loss of $5,000. This $5000 loss could then be offset against their other income, such as wages or salary, which would reduce their overall taxable income.
What is the impact of Negative Gearing on Housing & Wealth in Australia?
According to the Reserve Bank of Australia's submission Productivity Inquiry on First Home Ownership from 2003:
"...there are no specific aspects of current tax arrangements designed to encourage investment in property relative to other investments in the Australian tax system. Nor is there any recent tax policy initiative we can point to that accounts for the rapid growth in geared property investment. But the fact is that when we observe the results, resources and finance are being disproportionately channelled into this area, and property promoters use tax effectiveness as an important selling point."
As a result of this disproportionate level of funds into the housing and property sector, Negative Gearing has a significant impact on wealth and housing in Australia. It allows investors to build wealth by deducting their losses from their investment properties against their other income, encouraging further wealth generation through property. It has also arguably worked to inflate the price of housing, making it more difficult for first-home buyers to enter the market.
Negative Gearing has been the subject of much debate and criticism in Australia for many years. Some have labelled it "a legal tax rort for the rich," and that it benefits the rich far more than everyday Australians. Indeed compared to the rest of the world, Australia has one of the most generous Negative Gearing policies for property investors, potentially further skewing it's results.
How many Australians take advantage of Negative Gearing?
According to the Australian Treasury, during the 2012 to 2013 financial year, nearly 2 million Australians earned income from rental properties, with 1.3 million of these reporting a net rental loss, thus likely making use of negative gearing. Furthermore, nearly 70% of all Australians with a negatively geared property reported a taxable income of less than $80,000 per year.