Property investors breathed a collective sigh of relief when this year’s Federal budget retained current arrangements for negative gearing. So what exactly is negative gearing and why do real estate agents, and the REIQ as their peak body in Queensland, lobby for this tax relief to continue?
Firstly a ‘myth-buster’: This is not a tax break that lines the fat pockets of landlords and we’d argue one of the biggest beneficiaries of negative gearing is actually tenants.
In rough numbers approx one-third of our population live in a rental home, and unlike many modern nations, our government provides only limited housing. It’s there for a small number, especially those most disadvantaged, but for the most part in Australia we call on individual investors to provide rental homes. So how do we then attract investors to put their hard-earned into a property (and commit to a big loan from the bank)?
The promise of capital gains is the main attraction, with mid to long term growth rewarding many for their patience over past property cycles. The ‘running costs’ however, (and there’s commonly a shortfall in the early stages of the investment when expenses outweigh rents), is the pain an investor wears to stay in the asset while they wait for those gains. And if that cost is too high, or the prospect of growth too remote, investors sell up and another home is lost from the rental pool. Supply and demand… rents can only grow when we lose supply.
Negative gearing is simply the government allowing an investor to reduce their tax bill to compensate them for the high costs while their debt is high. Once they pay down some debt, or rents rise to exceed costs, the investor makes a profit and pays tax on it. So what of those wealthy landlords with minimal or no debt? They’re already paying tax and rarely benefiting from negative gearing.
Investors have a choice of asset classes and what’s not commonly discussed is this same tax break applies to most other investments too. Borrow to buy a bunch of shares and you can usually claim your losses. But unlike other investments, when you buy property you pay a huge whack stamp duty to the government, council rates and water bills during your ownership, and buy too many and the government will hit you again with land tax too. Add in some tricky legislation that provides tenants with various rights, and we already have a pile of disincentives on property investment.
Tax deductions and the rules on investment can be confusing. But it’s simple to see we need to continue attracting investors to property or rents will rise. Or we’ll be back asking government to find extra housing – and you and I will pay for that in higher taxes.
Note: Bees Nees’ principal Rob Honeycombe is the Chairman of the Real Estate Institute of Queensland. He wrote this article for the Market Outlook column of the Courier Mail.