PROPERTY

'Limiting negatively-geared properties per taxpayer would be bad policy'

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The negative gearing debate has heated up as Treasurer Scott Morrison suggests changes haven't been ruled out.

There has been talk of limiting the number of properties that investors can negatively gear and of placing a cap on the amount that can be deducted.

How would this impact property investors and the housing market? We ask Neville Sanders, president of the Real Estate Institute of Australia, for his thoughts on these potential restrictions.

negative gearing debate

What impact would changes to negative gearing (such as limiting the number of properties that can be negatively geared) have on the housing market?

Tax office data shows that most investors own only one property and this has not significantly changed over time. Further, contrary to popular misconceptions, there has not been a significant surge in the number of investors owning multiple properties.

Limiting negative gearing to a maximum number of properties per taxpayer - as has been suggested by many commentators - would be simply bad policy.

Supposing that the limit on the number of properties an individual could negatively gear is set at three, this would encourage people to invest in more expensive properties for no other reason than tax benefits.

For example, someone who has a $1 million property could negatively gear a larger amount of expenses compared with someone who has four $250,000 properties.

The latter individual may decide to replace the asset portfolio with fewer but more expensive properties, thereby creating a distortion in the market. It would also encourage artificial property splitting within families for no other reason than tax benefits.

Further, it would encourage inefficient capital allocation by investors. For instance, an investor with four properties would shift capital among loans to ensure that only three of the properties are negatively geared, with the fourth one positively geared, with total gearing unchanged.

There is also talk about capping the amount that can be deducted through negative gearing. Former prime minister John Howard has suggested many on modest incomes rely on this tax concession. What are your thoughts?

First, we need to understand that this is not a tax concession. The ability to deduct investment expenses for investments in a variety of assets, including property, shares and business ventures, is an integral part of the tax system.

The use of debt is a crucial part of investing and fostering economic growth. The ability to deduct the cost of debt and losses against income is necessary to ensure that investments are not taxed punitively.

The evidence from taxation statistics back up John Howard's claim. Data shows that around two-thirds of property investors who utilise negative gearing earn a taxable income of $80,001 or less a year and that individuals with taxable incomes of $80,001 or less a year claim most rental losses.

Setting a monetary cap would be an administrative nightmare as the effective deduction would vary depending on interest rates, which not only change over time but can change considerably within any given income tax year.

If the cap for an interest deduction was $20,000 - a figure that has been floated - this is equivalent to the interest deduction of a $400,000 mortgage at 5%. If interest rates doubled to 10%, which is not outside the realms of possibility, the cap becomes the equivalent of a $200,000 mortgage.

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Comments
Devona
May 27, 2016 9.08pm

"Data shows that around two-thirds of property investors who utilise negative gearing earn a taxable income of $80,001 or less a year"

Are retirees excluded from this figure?

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