Negative gearing, and its future as a part of the Australian taxation system, has certainly become a decisive topic within Australian federal politics. With much to be said by either side in the debate, with much of the rhetoric and discourse clouded in politics, it is difficult to trust much of the information that is presented in the debate. Hopefully this article will be able to depoliticise the debate around the policy and allow you to make up your opinion in regards to negatively geared property investments.

 

Negative gearing recap

Before we get too bogged down in the arguments of either side let’s take a quick overview on what exactly negative gearing is and how it relates to property investments.

 

Negative gearing refers to the tax mitigation strategy of claiming a loss on an investment against your taxable income, thereby reducing the total amount of tax owed to the government.

 

It is a common practice in Australia for people to purchase a property as a mean of investment. These properties often generate losses, i.e. the money made through rents is less than the mortgage repayment amounts. This loss can then be subjected to negative gearing in where the loss of the investment will be considered against the taxable income of the owner, reducing the amount of tax they are required to pay.

 

Times are a changing

Currently the shadow Labor government is proposing a radical redesign of the negative gearing system, redesigning the Australian tax system. To put simply the proposal seeks to restrict negative gearing on all property investments expect for new-build investments. This plan seeks to apply downward pressure on housing prices, reducing the demand for existing housing from investors, and thus providing a better property climate for first home buyers.

 

Arguments for restrictions on negatively geared property investments

It is claimed by Labor that by restricting negative gearing they will be able to greatly reduce the demand on Australian property by closing off the ability of investors to offset the loss that they make on existing property developments. There is a consensus on either side of the debate that this policy will greatly reduce the demand for existing housing. Where an argument arises, is whether that will have a positive effect on the Australian economy.

 

Labor argues that this downward pressure in housing prices will give new home buyers a chance to enter the market, as those looking to enter the market and purchase a primary residence in which to live are currently are having difficulty doing so due to the intensive competition from investors.

 

It is argued by the opposition that the current arrangements in respect to negative gearing are catering for the upper class of Australian society. They say policy provides such an attractive environment those investors with large amount of wealth that they direct all their focus towards the sector, creating a fiercely competitive market that first home buyers cannot hope to compete in.

 

Arguments against the planned restriction on negatively geared property

The Coalition has been vehement in their opposition of these proposed changes, citing that they would decimate the current housing market and deliver a crushing blow to the Australia economy.

 

The primary pillar off this argument is concerning housing prices. As stated above, both sides agree that this proposal will deliver downward pressure on existing housing prices. The Liberal party are concerned that for most Australian families their main asset and source of wealth is their primary residence, a property that is not used as an investment but rather a home and place to live. As this is existing housing the policy will see the value of this home reduced significantly, impacting on the overall wealth and financial stability of everyday Australian families, regardless of whether they are involved with negatively geared property investments or not.

 

Another core argument by the opponents of restricting negative gearing is the impact that it will have on ‘mum and dad’ investors, that is too say property investors that are of a middle class background, with only one and two properties that they are investing in in order to establish themselves financially for the future and into retirement. Placing these restrictions on negative gearing will greatly impact on the opportunities for these Australians to establish themselves as financially independent in retirement, something of particular concern for the government considering the forecasted demands on the pension system going forward due to the Australia’s aging population.

 

So there you have some of the main arguments for and against restricting negative gearing on investment properties. There are of course many facets to the argument, of which are best dissected with an informed and educated opinion. Full details of the Labor part plans for negative gearing can be found here.

 

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The information provided is of a general nature and is not intended to be constituted as financial advice. We recommend that you seek independent advice from qualified professionals before employing any strategies outlined.