The Government has faced new questions about whether it plans to make changes to negative gearing — which provides tax concessions on investment properties in Australia.
Labor promised to overhaul negative gearing ahead of the 2019 election, which it lost to the Coalition. It’s refused to commit to the policy ever since.
But…what is it? Here’s your negative gearing cheat sheet.
Negative gearing
Firstly, gearing refers to borrowing money from a bank to purchase an investment property.
Negative gearing is when the interest repayments and other expenses (like insurance and local council rates) of an investment property exceed the rental income it generates.
Negative gearing can also apply to other assets, but it’s mostly used in housing.
A negatively geared property means the owner can claim tax reductions on their losses.
Example
Sean owns an investment property — a two-bedroom apartment which he rents out for $800 a week. His interest repayments on his mortgage and other property expenses amount to $1,000 per week.
This means he’s losing $200 a week. This adds up to a $10,400 loss from his investment property annually.
Sean makes $120,000 per year from his job. At tax time, the loss from his investment property is deducted from his salary. His taxable income for the year is reduced to $109,600, and he ends up paying less tax.
Why?
Sean could increase the rental price on the apartment, but he wouldn’t be eligible for the same tax deductions.
However, investing in property isn’t solely about negative gearing and tax deductions. It’s also a popular means of wealth accumulation.
When Sean eventually sells his two-bedroom apartment, ideally, someone will pay more for it than he did.
Ultimately, the increase in the value of his property outweighs Sean’s accumulated losses.
Criticism
According to Treasury data, the Government lost $5.7 billion in tax revenue from negative gearing in 2023-24.
Groups including the Australian Council of Social Services (ACOSS), the Greens, and the Australia Institute argue negative gearing has widened the gap between homeowners and renters.
For example, a first-time homebuyer at an auction could be outbid by an investor seeking negative gearing/ tax deduction opportunities.
Labor
Labor went to the 2016 and 2019 elections with a proposal to overhaul negative gearing.
It wanted to scrap the discount for existing properties but promised to keep the tax discount in place for new builds. The policy was aimed at boosting housing supply and making the market more accessible for young people.
On both occasions, the party lost to the Coalition. Since its 2019 defeat, the Federal Labor Party has not committed to the policy.
Negotiations
The Government has a number of key pieces of legislation stuck in the Senate, including a ‘Help to Buy’ scheme where the Government would help new buyers pay for a property by becoming a co-owner.
As it stands, the bills don’t have the support of either the Greens or Coalition to pass.
However, the Greens said it would support the legislation if the Government scraps negative gearing.
Reforms
This week, Nine Newspapers reported that the Government had asked the Treasury to examine the costs of a negative gearing policy change.
Treasurer Jim Chalmers and the PM dismissed suggestions they were considering changes.
Speaking to the ABC, Albanese said Treasury analysis doesn’t mean a policy idea will be legislated.
A joint statement from senior Coalition Shadow Ministers warned negative gearing reform could “reduce supply” of homes.
Last year, Liberal Senator Maria Kovacic suggested “capping the number of properties that can be negatively geared” in her first speech to Parliament.
The Property Council of Australia has warned against changing negative gearing tax arrangements.
CEO Mike Zorbas pointed to analysis from the financial services firm, Deloitte, which in 2019 found could reduce housing stocks by 4.1%.
“We have a huge housing gap across Australia and when modelled negative gearing changes widen that gap,” Zorbas said.
