Property Investors – Are you relying on negative gearing?
Are you relying on negative gearing?
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.
Who is using negative gearing?
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.
Why is it such an issue?
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.
Demand drives price
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.
Should you bank on negative gearing?
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.
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Disclaimer
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.
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