Meddling with negative gearing will have consequences

 

By Hayden Groves – REIWA President    https://reiwa.com.au/

When it comes to property, everyone has an opinion on ‘negative gearing’. It’s a hot button issue that many people – whether for it or against it – feel very passionately about. It’s also a topic surrounded by a lot of misconceptions.

Perhaps the biggest misconception is that negative gearing is a tax that benefits the wealthy, when in fact the vast majority of investors are mum and dad types who are using property to help secure their futures. Arguments against negative gearing routinely fail to factor in that negative gearing is a legitimate deduction of expenses earned on investments.

Last month, the Australian Housing and Urban Research Institute reignited the negative gearing debate by releasing a report that proposed restricting negative gearing depending on investor income levels. The report suggests this could save the Federal Government $1.7 billion each year.

The reform model proposes that investors in the bottom 50% of the income distribution continue to receive a 100% deduction for losses sustained; those in the 51st-75th percentiles receive a lower 50% deduction, and those in the 76th-100th receive a zero deduction.

There are a number of issues we see with this proposal. For starters, the report fails to consider the impact this kind of change would have on the rental market. History shows that when changes are made to negative gearing tenants suffer as rents invariably rise as supply shrinks.

REIWA maintains its position that removing negative gearing or only applying it to certain criteria, such as weighting it depending on investor income levels, is risky. The WA property market is just starting to show signs of a recovery, and any meddling with negative gearing poses a genuine threat to the recent improvements we have observed.

Negative gearing has far reaching benefits, such as promoting investment in rental properties, and increasing the supply of new housing, which is essential to accommodating a growing population. The private rental market also provides the majority of rental accommodation for the public, helping to keep housing affordable and less government dependent.

In 2016, REIWA carried out a survey of negative gearing with 61% of respondents stating they would have a different view on property investment if negative gearing was restricted. Any policy reform that targets affluent/wealthy investors would simply dis-incentivise them from investing in property and subsequently encourage investment in other unaffected asset classes.

Taxes need to be structured in a way that are efficient, effective and of course, equitable. Applying reform to just one component of a broader system will only add further complexity to the tax system and put greater pressure on housing supply.

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