Negative gearing points to taxing times for government

Negative gearing has proven to be a positive boon for rental property owners in Australia, and appears set to soar as rent receipts decline and COVID-19 continues to take hold. 

Australian tax collectors were denied a potential $13.1 billion granted as offsets to investment property owners ahead of the 2019 election. 

The tax benefit arguably cost Labor victory as the Coalition ran attacks on their plans to remove the negative gearing along with franking credits, which were worth more than $10 billion for the 2017-18 fiscal year.

The latest data from the ATO showed there were more than 2.2 million people with rental properties in 2017-18, of which 1.3 million made a loss. Total losses rose by nearly 7 per cent, despite only 1.6 per cent more people claiming the offset.

A property is negatively geared when rental return is less than the interest repayments and other property-related expenses, with the difference claimed as a tax deduction.

About 10 per cent of Australians negatively gear a property, and perhaps unsurprisingly, it is the top end of town who benefit the most. 

Anaesthetists and surgeons are the workers most likely to negatively gear. Almost 30 per cent of anaesthetists and 28 per cent of surgeons have an investment property that is negatively geared. 

Around 22 per cent of people earning more than $180,000 after deductions use the incentive, according to ATO data. That compares with 10 per cent of people in the $37,000 to $87,000 income bracket.

Taxing times

The average landlord reported just over $21,000 in rental income, with around $13,300 in interest payments, more than $3,400 in capital works and more than $10,100 in "other deductions".

The median, or typical, landlord received less rental income but also had a much smaller loan and other expense claim.

Of the 1.3 million landlords reporting net losses, the average was $9,156.

Kevin Young, president of Property Club, whose members collectively own more than 40,000 rental properties, said the billions in negative gearing claims were dwarfed by the huge rise in overall property taxes in Australia.

“This is underlined by government finance figures that show that during the five years from 2013-2014 to 2018-2019, overall government taxes on property in Australia surged by 38.5 per cent to $32.6 billion during 2018/2019,” Mr Young said.

“Property investors are collectively paying more than $600 million in taxes each week.

“In contrast, the overall taxation income by all levels of government during this five year period jumped by 29.3 per cent to $559.8 billon per annum.

“GST collections rose by 18.8 per cent to $141 billion per annum, which highlights the fact governments are becoming increasingly dependent on property taxation as a growth tax.”

Mr Young also argued that negative gearing provided rental properties that saved the state social housing expenses and eased the burden of retired Australians on the welfare system.

“Any attempts to reduce negative gearing benefits would see a sharp fall in property investor activity in Australia and a collapse in property tax collections by government,” he said.

Rental remission

Australian Taxation Office assistant commissioner Karen Foat said she expects a significant rise in negatively geared investors and claims.

“We know that this year, there's a lot of landlords who are receiving a reduced amount of rent, whether that's because their tenants are paying less, or unable to pay at all, or if their property is sitting vacant,” she said.

“We would anticipate that there is going to be a greater number of people whose properties end up negatively geared because they still claim the expenses but they are likely to have some level of reduced rent.”

A 2.5 per cent decline in aggregate rents over subsequent years, which is touted as a pandemic-led possibility, would lead to an extra $2 billion of losses to government tax revenue.