Negative Gearing Safe From Australian Tax Reforms

by Mary Swire, Tax-News.com, Hong Kong

30 March 2010

Australia’s Treasurer, Wayne Swan, has played down fears in the housing sector that proposed measures arising out of the Henry tax review could include a cancellation of the existing negative gearing tax breaks.

It is said that a rental property is negatively geared when it is purchased with the aid of a mortgage, and its expenses (interest costs, depreciation and all rental deductions) exceed the rental income, and a loss is incurred. In Australia, those losses can be offset against other taxable income (including salaries or business income), enabling a reduction in income tax payable – and therefore most beneficial to people paying the top marginal tax rate.

The most recent Australian Taxation Office statistics for 2007-08 have indicated that property investors received AUD4.1bn (USD3.75bn) from rental interest deductions, and that almost 1.4m taxpayers were involved.

The chief executive of the Housing Industry Association, Graham Wolf, reacting to reports that the government looked askance on the negative gearing of rental investment property, said: “There is a mistaken dogma that allowing taxpayers to claim interest expenses on borrowings is a tax rort. There is no barrier to negative gearing on any form of investment and nor should there be. An investor can claim interest expenses on borrowings used to purchase shares and any other income-producing asset.”

“Most investment property is held by taxpayers with incomes under AUD75,000 a year,” he continued. “These investors are regular, hard working individuals and couples, including prospective first home buyers purchasing a rental property as a way of getting into the housing market.”

“If negative gearing is such a substantial tax break why is Australia suffering from a chronic shortage of rental housing?” he asked. “Why is there next to no institutional investment in residential rental property? A minority of investors purchased rental housing for negative gearing. Most were looking for a long-term return on their savings, often with an eye on their retirement.”

In reply, Swan, after a meeting with state treasurers on, amongst other topics, the Henry tax review, pointed out that he had never been against negative gearing in any of his previous statements. However, it is widely expected that, when the review is finally published, it will not comment favorably on the large tax breaks received by rental housing as it surveys the tax treatment of savings and investment.

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