Negative Gearing – Worth Keeping

It has been well documented that currently the federal government is conducting a full review of the taxation system, tagged as the ‘Henry Review’.

As part of this review the government has called on public submissions to assist in this review. These submissions provide State Governments, Community Groups,  Business Interest groups etc the opportunity to pass their opinion on what should happen with our taxes. In last month’s issue of ‘In the Know’ I made mention of the Victorian State government calling for Stamp Duty to be removed in place of greater access to Federal Government tax revenues. Recently, there is been renewed interest in looking at negative gearing and its impact on property.

Back in 1985 the Keating Government took measures to ban negative gearing, which resulted in a huge spike in rental cost to tenants, as investors sort to recoup the financial difference (loss) from this government action.  Needless to say it didn’t take long for negative gearing to be re-instated.

Yet it’s on the radar once again by some community and other special interest groups. To me the positives to why Negative gearing should be kept are:

1. Housing Supply

Private investors provide accommodation for those requiring it, and given the housing / accommodation shortage now, the government would need to invest billions into housing, and we all know the failures of high density social housing.

 

2. Negative gearing is not a tax benefit for the rich.

70% of all landlords have an income of less than $65,000 per year.  Only 10% of investors earn over $100,000 a year.  By removing this benefit, you are saying to average Australian’s trying to build a retirement nest egg, that your only option is superannuation, mostly via the share market.  Now for a fair portion of investors, the ups and downs, especially the latest ‘big’ correction in this marketplace is too much for them, yet removing negative gearing offer direct investors no real alternative options to shares.

 

3. Investment properties don’t remain negatively geared forever.

At some point in time in the future the income received through rent will exceed the cost (Interest on borrowings), so this income will be taxed at your indicative PAYG income tax rate for the year the investment had a positive return.  Furthermore in the event the property is sold, the government receives tax on the capital gain.  So they always get their share of income from allowing an investor to invest in residential property.

 

4. Any form of investing should not be discouraged, if it’s adding to the investors overall wealth position.

Our Government already has a future issue with retiring baby boomers unable to fund their retirements, so the government has to step in with Pensions, which cost us tens of billions a year to fund.  The more people putting themselves into a position to self fund the majority of their retirement with income or capital gains they have generated from their own investment activities, should be rewarded by the government, as they are less reliant on the ’system’ for hand outs.

 

The Henry review is expected to release    findings and recommendations in the final report in December 2009.  This report will then be considered by the Government in terms of what action they will or may take moving forward regarding our current tax system.  It will be very interesting reading and I hope we all, as Property Investors, ensure our voice is heard in the event we become disadvantaged.  I’ll keep you posted….