So what actually is negative gearing, and how do the tax concessions impact investment properties? Let’s take a look.
What is negative gearing and how does it work?
Negative gearing is a tax concession that applies when the cost of owning an investment outweighs the income it generates. The owner can then deduct that net loss from their overall income and lower their total taxable income, and therefore reduce their tax bill.
It can apply to any kind of investment in Australia but is most commonly associated with investment properties.
In practice, it means if a landlord earns, say, $40,000 in rent but spends $50,000 in mortgage payments on that same property, they can apply a $10,000 deduction to their taxable income.
What does capital gains tax have to do with negative gearing?
One of the factors that can encourage people to negative gear, even though that means running an investment property at a loss, is Australia’s concessions on capital gains tax.
Under these, if someone sells an asset after owning it for more than a year and makes a profit (or capital gain), only half of that profit is taxed.
Because home prices in Australia often rise so quickly, that means investors can earn significant capital gains from selling properties after a few years, making negative gearing particularly worthwhile.
“While making a loss on an investment property or shares might initially seem counterintuitive, some people are willing to do this in the expectation that the capital gain when they sell the asset will more than offset that loss,” the federal Treasury says.
Who benefits most from negative gearing?
According to tax analysis by Treasury released last month, 1.1 million Australians had negatively geared properties in 2021-22, and most of the financial benefits from concessions given to investment property owners go to high-income owners.
“Rental deductions are most commonly claimed by those with higher taxable incomes, with individuals in the top 30 per cent of taxable income accruing 65 per cent of the total benefit,” it wrote.
The concessions also benefit more men than women, as well as people aged between 40-59.
“In 2020–21, 1.2 million men claimed rental deductions and received an average tax reduction of $8070 – almost $2000 higher than the average for women,” Treasury wrote.
“Men received 58 per cent of the tax reduction, whereas women received 42 per cent of the tax reduction…
“More than half of the total tax reduction accrued to those in age cohorts between 40 and 59 years old. This reflects a larger number of rental property owners, higher average deductions and higher average taxable incomes within these age cohorts.”
How much do investment property tax concessions cost Australia?
Tax concessions on rental properties are estimated to have cost the federal budget $24 billion last year alone, according to the same Treasury analysis.
That number is set to increase, too, up to more than $28 billion in 2026-27.
We don’t know exactly how much of a benefit the capital gains tax concession provides to property owners, as it also covers all kinds of other assets, but we do have a dollar figure for negative gearing: in 2020-21, negative gearing cost $2.7 billion.
Why is there a push to change negative gearing and capital gains?
The first federal parliamentary sitting session of the year has seen various members of the crossbench – namely David Pocock, Jacqui Lambie and the Greens – call for the government to overhaul negative gearing and capital gains, capitalising on the government’s change of mind on the stage 3 tax cuts.
Prime Minister Anthony Albanese says his government supports the current investment property tax concessions, while Opposition Leader Peter Dutton has categorically ruled out the Coalition making changes to them.
A crossbench campaign without government or opposition support generally wouldn’t amount to much.
But the government is now trying to legislate a new housing plan – a “help to buy” package – for which they’ll need crossbench support to get through the Senate, and the Greens have announced they’ll use this as an opportunity to get negative gearing and capital gains on the political agenda.
”In negotiations with the government over the help to buy legislation, we’ll push Labor to end the tax handouts for big property investors, freeze rents and build public housing to help renters and first home buyers,” Greens leader Adam Bandt said.
He and his party are arguing negative gearing and capital gains concessions make it easier for investors to buy multiple homes than it is for someone to buy their first home.
The approach is similar to last year when the Greens held out on supporting the Housing Australia Future Fund until the government had committed about $3 billion extra to affordable housing construction.