Key Points
- In 2020-21, more than a million Australians accessed negative gearing, reducing total taxes paid by $2.7 billion.
- The Greens want negative gearing to be restricted to one investment property per person.
- The discount on capital gains tax is another feature of the system that some economists say should be reconsidered.
Some argue that a tax system that allows negative gearing pushes up the price of housing, while others say it keeps rents low.
With Australia's and , discussion of the strategy landlords use to reduce their tax bills hasn't abated.
So what is negative gearing, what is its impact on housing, and why do some people feel so strongly about it?
What is negative gearing and who benefits?
AMP chief economist Shane Oliver described negative gearing as the ability of an investor to offset any income from an investment against any losses or costs involved in maintaining that investment.
This means that, if the cost of maintenance or servicing a mortgage exceeds the rental income an owner makes from a property, they can offset that loss against their taxable income — and thus pay less tax.
More than a million Australians negatively gear at least one property. Source: Getty / William West
He said there had been an increase in negative gearing due to consecutive interest rate hikes, as rent was not always covering rising mortgage repayments.
How much does negative gearing cost the budget?
Treasury data released in January showed that 1.1 million Australians accessed negative gearing in 2020-21.
These rental losses provided a tax benefit of about $2.7 billion to investors.
Treasury estimates rental property deductions — including capital, interest and negative gearing — would jump 58 per cent by 2023-24, from $17.1 billion to $27.1 billion.
Who wants to scrap it and why?
Everybody's Home — a coalition of housing, homelessness, and welfare organisations — argues the $2.7 billion in "forgone revenue" could "deliver an enormous amount of social housing".
The group believes negative gearing has pushed up the cost of housing and widened inequality between those who can afford to enter the housing market and those who cannot.
Greens housing spokesperson Max Chandler-Mather wants investor tax breaks such as negative gearing significantly scaled back.
"Over 90 per cent of all property investor purchases are on existing dwellings," Chandler-Mather said.
"That means they're not actually adding to supply. What they're doing is hoarding homes that could have been used by a first-home buyer."
His party is demanding limits on tax discounts for property investors in exchange for its support of
Without the Coalition's vote, the support of the crossbench is crucial for the help-to-buy legislation to pass.
Is there a good argument for preserving negative gearing?
Oliver argues that, if it's housing affordability that people are concerned about, it would be better to tackle supply issues rather than negative gearing.
"Some argue that housing is more expensive because of the flow of investors in the property market but the reason why we have expensive property in Australia, the main reason, is a lack of buildings," he said.
"If you did away with negative gearing or restricted it, then there'd be less investment properties and less rental properties around."
Investors who negatively gear a property don't make a profit from rental income. But they may make a profit when they sell their property, and meanwhile, any rental loss reduces their tax bill. Source: Getty / Krisanapong Detraphiphat
"To worsen the burden on higher income earners, it could ultimately reduce the size of the Australian economy or reduce productivity growth," he said.
Oliver also noted that on investment properties bought after 1 January 2020.
Who benefits from negative gearing?
Economist Greg Jericho supports the Greens' suggestion to limit negative gearing to one household.
While negative gearing was often framed "as being for everybody", in reality it was "most used by the rich", said Jericho, who is based at the Australia Institute think tank.
"We know the more you earn, the more likely you are to negatively gear," he said.
However, as 70 per cent of property investors only have one investment property, he said, most would be unaffected by the Greens' plan.
"Certainly, a vast majority of people would not be affected if you were to limit negative gearing to just one property and we also know that the majority of benefits of negative gearing actually go to people who own more than one property.
"The problem with negative gearing isn't so much your mum and dad who bought a house and are negative gearing. It is the people who are very wealthy who have got three, four, five, six or more properties — the other ones who are really getting most of the benefits."
Jericho said negative gearing was not the only contributor to the current housing situation in Australia.
"We would argue that, actually, it's not so much negative gearing that's bad. It's the combination of the negative gearing and the capital gains discount," he said.
Investors who sell a property they've owned for 12 months or more only have to pay tax on half of any profit they make.
He said changes to capital gains tax were needed alongside any change in negative gearing.
"Without the changes to capital gains tax, I think negative gearing remains a very attractive and distorting policy," Jericho said.
"Instead of having a tax minimisation scheme that's disguised as a housing policy, we actually should be pushing policies that will help housing and housing affordability."
What have Labor and the Coalition said?
Treasurer Jim Chalmers has repeatedly ruled out changes to property-related tax breaks, including negative gearing and capital gains tax.
He also rejected the Greens' idea to limit negative gearing to one property.
"That's not something that we're proposing, not something that we are considering, not something that we are working up," he told Sky News.
Opposition Treasury spokesperson Angus Taylor has said the Coalitoin would not support changes to negative gearing.
Asked if it would consider making changes to capital gains and trusts, Taylor said the Opposition wasn't proposing "to go down those paths".
