Negative Gearing - The Facts
By David Hughes
First published in the MRC’s Watercooler newsletter. Sign up to our mailing list to receive Watercooler directly in your inbox.
With the Australian Government contemplating changes to negative gearing I wanted to outline some facts and provide some new analysis along the way.
The existence of negative gearing in Australia has allowed many Australians on relatively modest incomes to invest in property. Latest data shows around two-thirds of residential property investors who negatively gear had a taxable income of $120,000 or less.
An investment property is ‘negatively geared’ if the rental income is less than the cost of paying off the loan and expenses such as maintenance. When this occurs, the investor can deduct their net loss against other income. This isn't an exclusive perk for property investors. Across our tax system, it is an accepted principle that expenses we generate from seeking income are deductible.
In this way, a property investor's loan is the equivalent of the chef's knife, the tradie’s ute and the nurse’s uniform. You might think it a stretch to draw comparisons between nurses and property investors — in fact it's not. More nurses take advantage of negative gearing than any other profession bar one. Negative gearing isn't just a tool of the rich — we have published a list of the top 50 professions that utilise negative gearing which shows teachers, police, truck drivers and electricians ranking highly.
Australia is a high taxing nation and negative gearing provides a small incentive for Australians to invest in property, helping to increase the supply of housing and helping everyday Australians build household wealth.
Negative gearing reduces tax revenue by $5.7b a year. Yet as our analysis shows, Australians pay $100.3b in total taxes on property annually (including capital gains tax and state property taxes), dwarfing the modest concession investors get from negative gearing.
HERE ARE THE FACTS
Who are Australia's property investors?
2,268,161 Australians invest in a rental property:
71% own just ONE investment property. Only 0.8% are property moguls with SIX or more investment properties.
Over 700,000 are under 45 years old.
41% are women.
18% are Trade Union members.
The value of three-quarters of investors’ portfolios is less than $1 million.
The vast majority (1,700,000) of properties rented out by investors are at the more affordable end of the market and valued under $1.25m.
How many are benefiting from negative gearing?
Of Australia’s 2,268,161 property investors:
1,318,642 made a profit from their rental in 2021-22.
While 949,519 investors made a loss in 2021-22 (making them negatively geared).
Is it just the wealthy who are benefiting?
65% of negatively geared residential property investors have a taxable income of $120,000 or less.
Negative gearing is used by over 27,600 nurses (the second highest of any profession) and 28,000 teachers.
Our analysis of the electorates with the highest number of negative gearers show many are in the Labor held seats in the outer suburbs of Sydney and Melbourne.
How much does negative gearing cost?
Negative gearing deductions reduce tax revenue by $5.7b a year:
However, individual property investors pay $45.6b a year in Capital Gains Tax.
On top of this Australians pay $40.2b in property related taxes each year.
What could happen if negative gearing is scrapped?
Negative gearing encourages investment in rental properties and increases the supply of rentals.
Abolishing negative gearing arrangements could cause rents to rise across the country, like they did in the 1980s when Labor briefly abolished concessions. Our research here provides some historical context.
Negative gearing is back on the agenda on account of the persistence of the Australian Greens, coupled with Labor’s innate distrust of property investors. The influence of the Greens is always greatest under a Labor government. In the event of a minority government after the next election, we can expect pressure to adopt other elements of the Greens agenda. Here are some of their longstanding policies:
$1.5 billion in ‘climate repatriations’ to be paid to other countries
A new Death Tax and higher income and corporate tax rates
Abolishing the Private Health Insurance rebate
A $312 billion cut to defence spending and scrapping the US alliance
700% renewable energy target
Banning horse racing and legalising drugs
Removing tax exemptions for religious organisations
Back to negative gearing, there is a tendency for both sides of the debate to overstate its alleged harm or benefit to the housing market. Yet the motivation behind those seeking to scrap negative gearing should concern us all. We live in an increasingly divided society and opponents of negative gearing will seek to turn the debate into an emotive war between young and old, rich and poor. As the data shows this is an outdated and misguided ploy. The common thread connecting most property investors isn't a demographic or social status — it’s their aspiration and desire to improve their financial situation bit by bit.
“Frugal people who strive for and obtain the margin above these materially necessary things are the whole foundation of a really active and developing national life.” - Robert Menzies, May 1942.