Negative gearing is one of Australia’s most prevalent tax shelters and has been the focal point of an ongoing and heated debate. This debate has become more heated with the recent housing boom in the eastern states which has resulted in the median house price in Melbourne rocketing to $700 thousand dollars, around 10 times the average wage. With suburbs in Sydney now more expensive than in Manhattan, you can see why the IMF has declared Australia one of the most expensive cities in the world to buy property in. This has created a real risk that the ‘millenials’ (those born after 1980) may become the homeless generation. Negative gearing and affordable housing are key issues in the forthcoming election. Labor’s plan to reform negative gearing and the capital tax discount effective from 1 July 2017 is aimed at helping put that Australian dream of home ownership back within reach of this generation. The Coalition will not make any changes to negative gearing. Prime Minister Malcolm Turnbull says “Labor’s reckless changes will reduce property values. They’ll devalue every home, every property in Australia.”
The strategy – what is negative gearing?
Typically, negative gearing arises where an investor purchases property with the assistance of borrowed funds and the total expenses associated with holding that property, such as interest repayments, repairs or depreciation, exceed the gross income derived from a levered investment, creating a net loss position. The loss can be deducted against the taxpayer’s other assessable income and any unclaimed losses from negative gearing can be used to offset future assessable income or capital gains.
The negative gearing concession can be used in conjunction with the capital gains discount. In that regard, generally only 50 per cent of the capital gain will be subject to tax at the time of disposal of the property. Accordingly, when coupled with the ability to offset unlimited and un-quarantined investment losses against assessable income outside the investment, the discount offers a second ‘advantage’ to taxpayers who use negative gearing. Further, both mechanisms allow for some element of deferral of the loss which could be manipulated to the taxpayer’s advantage.
The drivers of reform
Despite its popularity with investors, there have been numerous criticisms of negative gearing focused particularly upon the inequities that it creates. The most common criticism of the current position on negative gearing is that it benefits high income earners and the wealthy. High income earners have the capacity to leverage more than lower income earners and higher income earners attract a higher marginal tax rate, which means that the benefits of negative gearing can reduce their tax liability significantly more than lower income earners who attract lower marginal tax rates. Further, high-wealth taxpayers are more likely to have strong enough cash flows in the form of salary and wages or income on positively held investments to enable them absorb the losses from negative gearing without a significant impact on their disposable income. While the Australian Taxation Office (ATO) statistics indicate that over half (66.5 per cent) of the taxpayers claiming deductions for their investment property have a taxable income of $80 000 or less, these statistics are potentially misleading as a proportion of these taxpayers are only classified as ‘middle income’ because significant deductions (including those attributable to negative gearing) have already been deducted. When gross income (rather than taxable income) is used as the measure, statistics show that over half of all negatively geared rental property investors earn over $100,000 and 30 per cent earn over $500,000.
This inequity would be partially alleviated if low and middle-income earners benefited indirectly from the concessions through greater housing affordability. However, this is not the case, almost 93 per cent of investment loans are directed towards the purchase of existing dwellings. This means the concessions overwhelmingly support investments that do not contribute to expanding the housing supply which is exacerbating current issues surrounding housing affordability. As stated by Liberal MP John Alexander “Negative gearing has worked very well when it has provided affordable rental properties. The moment that it intrudes on the marketplace and stops young families from buying the house, that’s not ideal. And that’s what’s happened in this moment when interest rates have gotten so low.”
While negative gearing has remained relatively untouched in the Australian tax system since the late 1980s, the numerous criticisms of negative gearing focused particularly upon the inequities that it creates provide an impetus for reform. However, Australia’s current economic conditions may suggest that any reform proposal is not appropriate in the short-term. The mining and resources sector as well as the banking sector were driving Australia’s economy and are now more vulnerable and potentially sensitive to collapse. Further, it is unclear just how sensitive the inflated real estate market is, but the government will be wary that any shock could be the catalyst to a crash. With record low interest rates, the Reserve Bank of Australia has very limited influence on economic conditions and would have no way of counteracting an economic downfall resulting from the reform of negative gearing.
For a more in-depth analysis of the issues concerning negative gearing reform in Australia see Sylvia Villios, Paul Kenny and Michael Blissenden, ‘Are changes to negative gearing in Australia imminent?’ (2015) 2 (9-10) Australian Tax Law Bulletin 195.
Greg McKenna, ‘Australia’s Obsession With Negative Gearing And Property Investment Is Costing The Economy,’ Business Insider Australia, 10 November 2014; Richard Edmonds, ‘Structural Tax Reform: What Should be Brought to the Table?’ (2015) 30 Australian Tax Forum 393, 405.
 Four Corners, ‘Home Truths’, Ben Knight, Klaus Toft and Mary Fallon, Reported Monday 2 May 2016.
 Joint Doorstop interview with The Hon Malcolm Turnbull MP, Prime Minister Penshurst, Sydney 24 April 2016 available at http://sjm.ministers.treasury.gov.au/transcript/058-2016/ on 3 May 2016.
 Jim O’Donnell, “Quarantining Interest Deductions for Negatively Geared Rental Property Investments” (2005) eJournal of Tax Research.
 James Beckett, above n2, 21, 21.
 Income Tax Assessment Act 1997 (Cth) s 8-1.
 James Beckett, above n2.
 Income Tax Assessment Act 1997 (Cth) div 115.
 Income Tax Assessment Act 1997 (Cth), sub-div 115-A.
 Michael Janda, ‘The myth of ‘mum and dad’ property investors’, ABC, 24 September 2014 <http://www.abc.net.au/news/2014-09-24/janda-the-myth-of-mum-and-dad-negative-gearers/5766724>.
Australian Council of Social Service, Fuel on the fire: Negative Gearing, Capital Gains tax & Housing Affordability (Australian Council of Social Service, 2015).
 ACIL Allen Consulting, ‘Australian Housing Investment: Analysis of Negative Gearing and CGT Discount for Residential Property’ Final Report to the Property Council of Australia and Real Estate Institute of Australia (ACIL Allen Consulting, 2015) 18.
 Australian Council of Social Service, above n 27, 15.
 Reserve Bank of Australia, Financial Stability review – Box C (Reserve Bank of Australia, 2014) 51.
 Australian Bureau of Statistics, 5609.0 Housing Finance, Australia (10 April 2015) Australian Bureau of Statistics <http://www.abs.gov.au/AUSSTATS/abs@.nsf/DetailsPage/5609.0Feb%202015?OpenDocument>.
 Saul Eslake, Submission No 2 to the Senate Economics References Committee, Australian Housing Policy: 50 Years Of Failure, December 2013, 10-11.
 Ben Knight, ‘Budget 2016: Negative gearing helping drive housing prices up, Liberal MP John Alexander says’, 2 May 2016 available at http://www.abc.net.au/news/2016-05-02/negative-gearing-driving-house-prices-up-liberal-mp-says/7374478 on 3 May 2016.