The owner can claim a deduction for the cost of repairing an investment property, but not initial repairs when the property was first purchased.
Some commentators think that negative gearing has distorted the housing market. They point to negative gearing as one of the main factors in housing affordability having halved in real terms over the last 30 years since negative gearing has been in place.
Politically, negative gearing is seen as providing a tax advantage to the rich. Some political advisers say that it is an unfair mechanism to assist wealthy individuals to write losses off against their other taxable income but acquire a property at someone else’s expense and enjoy a capital gain into the bargain.
The original purpose of the policy of negative gearing was to boost the housing supply by encouraging greater investment into housing construction. Some people say that by this measure, it has been a policy-failure as recent data shows that new construction accounted for just 7% to 8% of the total value of investor loan approvals. It appears that Australian investors have little interest in newly constructed properties.
According to the ATO, Australia had 1.9 million property investors in the 2011-12 financial year. Most of those investors failed to cover their costs, suffering a collective $6.8 billion net rental loss. Losses of this magnitude have become exceedingly common in Australia over the past decade.
This suggests that most Australian property investors don’t really care about rental yields. They are in it for the capital gains, subsidised by other taxpayers.
Organisations such as the Grattan Institute say that as a government policy, negative gearing is expensive, inefficient, inequitable and reduces home ownership.
Negative gearing is once more in the political spotlight ahead of the 2016 federal election as parties debate how to deal with housing affordability and find ways to deal with greater demands on the budget.
The Green Party are advocating for abolition of negative gearing, and are relying upon a formal costing by the Parliamentary Budget Office which shows that getting rid of negative gearing could deliver a cumulative budget saving of $42.5 billion over the decade.
Federal Labor hasn’t ruled out taking a similar policy to the next election, but is still doing its sums, talking to industry and welfare groups and weighing up the political risks.
The Liberal Party says that the government has no plans to make changes to negative gearing, and believes that it would be counter-productive, as it could make it harder for people to invest in the private housing market and this would reduce the supply of rental accommodation and increase rents. Government figures also claim that negative gearing encourages more housing construction.
However, opponents say that only eight per cent of negatively-geared properties are new homes and the rest are existing properties, and therefore the effect on construction is marginal. There is a perception that the tax benefits flow to the wealthiest Australians, and some commentators say that most people with negatively geared residential property are in the top 40 per cent of income earners and the top two per cent of income earners claim half of all capital gains.
I predict that the Australian Government will revoke the tax-break known as ‘Negative Gearing’.
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Check out the full report containing all 10 Estate Planning Predictions from senior Australian lawyer Rod Genders. Valuable insights to prepare for the future and help protect yourself, your family and your assets.
