If you’re going to do a thorough review of Australia’s taxation system then everything’s got to be reconsidered. So with Treasury head Ken Henry’s rummaging around in the tax-breaks closet we weren’t surprised to hear negative gearing again pulled out for discussion. One of our landlord clients rang us concerned, online investor blogs have started a nervous chatter and the weekend’s Courier Mail headlined with “Negative gearing attacked for driving up property prices”.

What is it? The ATO says “A rental property is negatively geared if it is purchased with the assistance of borrowed funds and the net rental income, after deducting other expenses, is less than the interest on the borrowings“. So it costs more for you to own the property than a tenant will cover with rent payments.

Okay so we’re real estate agents, we have a vested interest in encouraging property investment. But so does the 32% of Australia’s population that rents. Who will provide their housing if we discourage investors?

A recent get-together of unions, welfare reps, conservationists and consumer groups discussed the Henry Review. The group, calling themselves “Community Tax Forum”, says Australia is a low taxing nation. Blaming negative gearing for high home prices their spokesperson said, “There’s no doubt we’ve got the most generous system in the world for rental investors”. Maybe they have images running through their heads of wealthy old landlords banging on poor pensioners’ doors demanding more rent…

The Real Estate Institute prepared a paper on the topic as far back as June 2008. Their findings: 72% of property investors using negative gearing earn $63,000pa or less. Just 11% earn over $95,000pa. Most are Mum and Dad investors building their retirement nest eggs. The Property Council says negative gearing costs the tax man $2billion a year, but taxes on property generate $29billion.

Of course Paul Keating had a crack at this tax break in July 1985, limiting a property investor’s interest deduction to that property – that is, not letting them claim the loss against other income. Either people forget too easily or they choose to ignore history’s lessons. Following the 1985 change new housing construction plummeted and rents rose 32% in Brisbane, 37% nationally. By 1987 Mr Keating had backflipped and rental supply eventually caught back up to demand.

Property investments don’t stay ‘negative’ as rents rise and principals are repaid, and at some point they’re sold with capital gains tax incurred by the investor. So in time the Treasurer will get his pound of flesh. And in the meantime our nation’s tenants can enjoy more reasonable rents.

Despite our role as real estate agents we would welcome your opinion! Do you agree with tax breaks for property investors?