Negative gearing: it’s back in a big way as interest rates rise sharply
Australia’s 2.2 million property investors are awaiting the first Labor federal budget since May 2013, and what it may mean for their tax bills.
Negative gearing is back with a vengeance in the real estate investment industry.
We can blame this on the Reserve Bank’s rapid-fire interest rate rises. Six moves in six months have added 2.5 per cent to mortgages and pushed repayment costs up by 36 per cent.
Interest is usually the biggest single cost for property investors, and the prime contributor to negative gearing – which is where an investment’s costs outweigh its income and deliver the owner a tax deduction.
Negative gearing is often viewed as a positive by would-be property investors, but the truth is it should be avoided wherever possible. Unfortunately, that will be difficult for an increasing number of landlords in the current environment.
The latest Australian Taxation Office data shows that in 2019-20, 1.3 million of Australia’s 2.2 million people who owned a rental property claimed a net rental loss.
By 2020-21 that number had dropped to 1.2 million.
I suspect it will fall further for
2021-22, as rents rose while interest rates remained low. But it will surge higher again in this financial year as a result of the recent rate rises.
Increased reliance on negative gearing is not good for investors. It means more people are losing money on their investments, and will only receive a portion of that loss back from the ATO through their tax return. More negative gearing also means less income for the ATO.
Investors should always aim for positive gearing as quickly as possible. A positively geared property puts money in their pocket, and only some is handed to the ATO.
The exception to this rule is when investors have large depreciation and capital works deductions, usually stemming from recently purchasing a new property.
These deductions are known as non-cash deductions, costing the investor nothing from their pocket but often totalling more than $10,000 in a financial year.
Investors should also be conscious that in less than two weeks the new Labor government will hand down its first federal budget since it lost to Tony Abbott in 2013.
You might remember the Labor Party tried to toughen up negative gearing rules at the 2019 election, arguably contributing to its shock loss.
Labor also stopped negative gearing back in 1985, but then reinstated it in 1987.
I doubt new Treasurer Jim Chalmers will sharpen the axe on negative gearing this budget, knowing how much pain it caused his party previously. But a reluctance to touch negative gearing doesn’t mean property will be left alone completely.
While making life harder for the 2.2 million taxpayers who invest in property has not been a ticket to long-term electoral success, governments still love to tinker.
Investors’ people power showed its strength recently when the Queensland government shelved plans to raise more from its state-based land tax by including investors’ land in other states.
Given the Greens’ performance in the last election, you might also consider their current campaign calling for an Australia-wide rent freeze. This would squeeze supply as investors exited their properties in droves – as some started to do in anticipation of the Queensland move.
More affordable housing is the key solution to meeting surging demand for properties to rent. That’s what federal and state governments should be focused on right now.
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