Property Investors – Are you relying on negative gearing?
With the RBA weighing into the debate about negative gearing and capital gains tax breaks for property investors, should your property strategy be reliant on either?
Property ownership has been increasingly under the microscope for many Australians, especially in Sydney where price growth has many people concerned about housing affordability. The Reserve Bank of Australia has weighed in on debate
, expression concern about whether the twin tax breaks of negative gearing and the capital gains tax discount are driving too much investor dollars into housing.
The Government has ruled out any changes to either tax break, however if you are a landlord with a negatively geared property, should you be concerned?
The latest taxation statistics show that Australians claimed $22.5 billion in rental interest deductions in 2012/13 against gross rental income of $36.6 billion. While not as bad as previous years because of the low cost of borrowing, it's more than the entire Australian Defence budget of 2013-14.
Negative gearing occurs when landlords claim more in deductions than what they earn for an income-producing asset when purchased with debt (i.e. a mortgage). It is not only property – you can negatively gear shares, for example – however it is' property that is the most dominant negatively geared asset claimed by Australians.
The use of property deductions isn't limited to higher income bracket earners. In fact, the highest proportional losses were experienced by Australians with incomes between $55,001 and $80,000, where deductions exceeded rental income by more than 28%. Negative gearing makes owning an investment property more accessible than those who would potentially not invest for the long term in property value alone.
The Reserve Bank has stated that the 'hot' property market, particularly in Sydney, is because "Investor demand continues to drive housing and mortgage markets, with low interest rates and strong competition among lenders translating into robust growth in investor lending." In NSW, lending to investors now accounts for almost half of the value of all housing loan approvals.
Many tax policy experts generally hold the view that negative gearing distorts the market and - in combination with the CGT discount - provides considerable and unnecessary tax advantages to those who least need them but note the stats in relation to who's using the tax break.
To quote one:
[Negative gearing] is a uniquely Australian phenomenon (no other country is so generous) and I would abolish it (and the CGT discount) immediately (and not be so generous as to grandfather existing owners). In mid-1985, the suggestion led to introduction of "negative gearing" provisions, with the effect of limiting deductions for interest expenses incurred to the amount of rental income generated.
More relevant research has subsequently debunked the suggestion that the spike that happened in Sydney house prices had little to do with the abolition and a lot more to do with other, unrelated market forces.
Due to the wide spread of utilisation of the tax break and political pressure by a range of interest groups, the major political parties have not yet had the courage to introduce reforms in this area.
The Government Tax White Paper is due out later this year and may provide a better indication of any potential risk for investment property owners. But, negative gearing is not something to bank on as a long term strategy.
Contact Bates Cosgrave on 02 9957 4033 to review the tax position of your current property investment strategy.
This article is provided for information purposes only and correct at the time of publication. It should not be used in place of advice from your accountant. Please contact us on 02 9957 4033 to discuss your specific circumstances.