Navigating the debate on negative gearing is crucial for any Australian property investor.
This guide will help you understand the core arguments that are for and against the policy, as well as explaining how this policy may fit into your investment strategy.
Negative gearing is a tax policy that allows property investors to minimise their tax.
Investors are able to deduct a rental property’s expenses, such as mortgage interest, council rates and maintenance costs, from their personal taxable income when those expenses exceed the rental income generated by the property.
This effectively reduces their overall tax payable.
For many, this tax benefit is a key reason to enter the property market.
Supporters of negative gearing argue it plays a vital role in the housing market and broader economy. Here are the pillars of their argument:
1. Increases Rental Supply & Stabilises Rents
A major argument in favour is that negative gearing encourages investment in rental properties.
By making it financially viable to own a rental, negative gearing incentivises investors to provide a supply of housing to the rental market.
Without this incentive, the number of available rental properties could decrease, potentially leading to a rental shortage and higher rents. This is seen as a way to help keep rental prices more stable.
2. Stimulates Economic Activity
Negative gearing also fuels the construction sector. Investors purchasing new properties, including off-the-plan apartments or house-and-land packages, stimulate demand for new construction.
This creates jobs and economic activity in related industries, from building and trades to finance and real estate.
3. A Wealth-Building Tool for “Mum and Dad” Investors
For many average Australians, negative gearing is a way to build wealth for retirement.
So-called Mum and Dad investors can use investment properties as a long-term strategy for financial security.
By leveraging a property’s future capital growth, they can use it to build a financial foundation for their later years, reducing reliance on the age pension.
The Case Against Negative Gearing: Market Disruption
Critics argue the policy creates significant problems, primarily concerning housing affordability and tax fairness. Here are the pillars of their position:
1. Drives Up House Prices
The most significant criticism is that negative gearing drives up property prices.
Detractors claim investors, who are able to offset losses and benefit from capital gains tax discounts, are incentivised to outbid first-home buyers.
This fuels demand, particularly for properties with strong potential for capital growth, making it harder for aspiring owner-occupiers to enter the market.
2. Unfair Tax Concession for High-Income Earners
Negative gearing is also said to disproportionately benefit high-income earners because they are in higher tax brackets and can claim a larger tax deduction from their investment losses.
Critics say it is an inequitable tax break that provides a significant advantage to those who are already wealthy, while offering minimal benefits to low- and middle-income earners.
3. Encourages Speculation
The policy is often seen as an incentive to purchase property for capital gain rather than for rental income. This focus on speculation can contribute to market volatility.
When property values stagnate or decline, investors who rely on capital growth to cover their negative cash flow can face significant financial strain. Potentially, they will quickly offload the property, increasing the risk of a market downturn.
Final Verdict: Finding Your Strategy
Negative gearing is a complex topic with valid arguments on both sides. As a potential property investor, you should understand that while the policy can offer significant tax advantages, it’s not a standalone strategy.
The best approach focuses on long-term goals, property location and sound financial planning, rather than relying solely on a tax benefit.
NOTE: The information in this article is general in nature and provided as a market overview only. Always consult your financial adviser or accountant for advice specific to your personal circumstances.