Negative gearing explained: What is it and how does it affect Australian real estate prices?

The PM is defending a decision to consider major changes to negative gearing. But what is it, and how will it affect you?

Speculation on Prime Minister Anthony Albanese’s plans for negative gearing is mounting following reports the government has asked Treasury for advice on potential changes.

The move could signal a radical new housing policy is on the cards, with federal officials now believed to be looking at options to scale back negative gearing and the tax concessions negative gearing produces.

Negative gearing delivers billions of dollars in annual tax benefits and has long been a target for the Greens, who want to see the process scrapped.

But what exactly is negative gearing, why is it so important and how did it become such a divisive issue? We answer some of the most common questions below.

Prime Minister Anthony Albanese is at the centre of speculation around controversial plans for negative gearing. Picture: Patrick Gee

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What is negative gearing?

Negative gearing is a situation where an investor spends more on the costs of their rental property – interest, strata fees, maintenance and upkeep – than they receive in rent.

It means they made a loss on their investment for that financial year.

And in Australia that loss can be deducted from their taxable income when they do their tax returns. Treasury figures show 1.1 million Australians had negatively geared properties in the 2021-22 financial year.

Why does Australia have negative gearing?

Negative gearing was introduced in the 1930s in Australia as a way to address housing shortages. It was designed to incentivise Australians to invest in property and boost the number of rental homes available.

Being able to deduct rental losses from your other income (such as wages) comes about because of two features of the Aussie tax system.

First: we tax income comprehensively. That means we add up all sources of income – wages, bank account interest, dividends from shares, investment property rents – and tax them together, rather than taxing each separately.

Second: the costs of earning income are deducted from the income – essentially, you’re taxed on your net income. That’s not just true for rental properties: interest expenses or strata fees incurred on investment property can be deducted for the same reason that uniform costs or work-from-home expenses can be deducted. They are the costs of earning that income and would not have been incurred otherwise.

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Many worry that if negative gearing was abolished, a large number of investors would either hike up their rents to cover the loss.

Who benefits from negative gearing?

People on higher incomes benefit the most as it minimises the amount of income tax they are liable to pay while allowing them to reap capital gains over time through investing.

According to Treasury analysis, individuals in the top 30 per cent of taxable income received about 65 per cent of the total benefit of negative gearing in the 2021-22 financial year.

What are the arguments for negative gearing?

By incentivising property investment, negative gearing helps Australians with higher incomes grow their wealth through property while adding to the supply of available rentals.

Many worry that if negative gearing was abolished, a large number of investors would either hike up their rents to cover the loss, or sell their properties, reducing the rental stock available in an already tight market.

Due to high property prices, it can be hard to find properties that earn enough rent to cover the mortgage. If negative gearing wasn’t an option, investing wouldn’t be so attractive.

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What are the arguments against negative gearing?

Treasury figures show negative gearing cost $2.7 billion in lost tax in 2020-21 – a figure likely to be higher this year due to rising interest rates.

Many believe negative gearing has helped push up property prices by driving demand among wealthy investors. Since the bulk of investors buy established properties, they compete against homebuyers for housing, which tightens supply even more.

Housing affordability has become a huge problem. Research from AHURI shows while high income families accounted for just 8 per cent of renters in Australia in 1996, families earning about $140,000 or more made up 24 per cent of the renting population in 2021.

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Due to high property prices, it can be hard to find properties that earn enough rent to cover the mortgage.

What is the federal government’s stance on negative gearing?

Both the Albanese government and the Coalition have previously made it clear that neither plan to change Australia’s current policy around negative gearing, however, current reports around the government’s request for Treasury advice suggest Labor’s position on the matter may have shifted.

The Greens, however, have been staunch in their opposition to negative gearing, arguing the tax help has made it easier for wealthy investors to buy properties than first home buyers.

The Hawke/Keating Government wound back negative gearing in 1985 but it was reinstated again in 1987 after lobbying from property investors and skyrocketing rental prices in Sydney.

In the 2019 election campaign, then ALP leader Bill Shorten proposed only allowing negative gearing for newly built properties. Labor lost the election.

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Prime Minister Anthony Albanese this morning amid backlash over tax plans. Picture: Picture: Patrick Gee

Do other countries have negative gearing?

Countries like Germany, Japan and Canada have negative gearing concessions. In the US, rental losses from a property can only be offset against rental income earned from another property or investment, but not against employment income.

In the UK, rental income and employment income are taxed separately and rental losses can only be offset against profits from other properties or carried forward to a later year. New Zealand is phasing out negative gearing.

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