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Will eliminating negative gearing be a serious threat to our property markets?

The possibility of changing the treatment of negative gearing has once again been in the news.

I have already explained why I think negative gearing should not be abolished for property investors and you can read Ed Chan’s thoughts here.

Recently the Real Estate Institute of Australia (REIA) weighed in to the argument highlighting the importance of negative gearing to the Australian property market and saying its removal could be detrimental to all property owners.

Before we look at their thoughts, first let’s have a look at…

How many property investors really use negative gearing:

When the Australian Tax Office (ATO) released the taxation statistics for the 2010/11 financial year the statistics showed that over the year there were 1,811,174 individuals that owned a rental property.

This was out of 9,416,002 individuals that have a taxable income and 12,637,623 individuals that lodged a tax return.June 2013 Property Investment prices

The data indicates that 14.3% of individuals that lodged a tax return owned investment properties while a greater 19.2% of individuals that reported a taxable income owned investment properties.

This indicates that despite the fact 1,811,174 individuals own investment properties, the vast majority of Australians don’t invest in residential property.

Of the 1,811,174 individuals that reported to the ATO as having an investment property, 1,213,595 of these individuals, or two out of every three investors, were recording a loss on their rental income.

The total value of these losses over the year was $13.285 billion.

Obviously negative gearing of investment properties allows owners to claim a tax deduction on these costs.

The average annual loss for these property investors with negatively geared properties was $10,947 or $210.50/week.

Here’s what the Real Estate Institute of Australia had to say:

Real Estate Business wrote:

REIA chief executive Amanda Lynch said the federal Treasury is again pushing for the removal of negative gearing, and the rumour is modelling will be done on retaining it for new housing only.

“This is a serious threat not only for our profession and geared investors but potentially for all property owners,” she said.

Negative gearing increases investment supply with almost 1.9 million Australians investing in the residential property market.

“The arrangement keeps rents lower than they otherwise would be,” she added.

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The Hawke government abolished negative gearing for property in 1985, only to have it reinstated in 1987.

According to the REIA, during that period rents increased by 57.5 per cent in Sydney, by 38.2 per cent in Perth and by 32 per cent in Brisbane, highlighting the importance of upholding the arrangement.

The Henry Review – released in 2010 and led by then Treasury Secretary Ken Henry – acknowledged that negative gearing applies downward pressure on rents.

The REIA estimated the impact of the implementation of the Henry Review recommendation to replace the current negative gearing arrangement with the introduction of a 40 per cent discount for income from rental properties would lead to an increase in the weighted average capital city median house rent by 2.4 per cent.

“In the current tight rental market, expectations are for outcomes similar to the mid-1980s,” Ms Lynch said

“The removal of negative gearing would increase demand for social housing, an area that governments have been struggling to address.”

Based on the information on rental property schedules by state and territory, the REIA estimates the following increase in median rents as the result of the Henry Review recommendation:

-0.8 per cent for NSW
-1.9 per cent for Victoria
-3.3 per cent for Queensland
-2.3 per cent for SA
-1.9 per cent for WA
-1.1 per cent for Tasmania
-1.2 per cent for NT
-2.4 per cent for ACT



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Michael is a director of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He's once again been voted Australia's leading property investment adviser and his opinions are regularly featured in the media. Visit Metropole.com.au


'Will eliminating negative gearing be a serious threat to our property markets?' have 2 comments

  1. Avatar for Property Update

    September 7, 2014 @ 7:28 pm Ashley Smith

    When talking about abolishing negative gearing, would it be retrospective. Meaning, would existing negatively geared properties still be allowed to claim a tax deduction?
    When the Hawke Government abolished negative gearing was it retrospective?

    Reply

    • Avatar for Property Update

      September 8, 2014 @ 7:52 pm Michael Yardney

      Ashley
      Obviously no one knows what or if anything will happen with negative gearing, but last time round it was NOT retrospective, and it’s unlikely they would make it retrospective this time.

      They tend not to do this with tax matters

      Reply


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