Canberra's big balancing act could hit negative gearing
THERE is a lot of speculation about how the federal government can increase tax revenue to keep its promise of a balanced budget. Two areas mentioned regularly as targets are the negative gearing of rental properties and, the biggest cash cow of all, superannuation.
THERE is a lot of speculation about how the federal government can increase tax revenue to keep its promise of a balanced budget. Two areas mentioned regularly as targets are the negative gearing of rental properties and, the biggest cash cow of all, superannuation.The banning of negative gearing is often done on the basis of social and tax equity.Among the crimes that negative gearing is accused of are a lack of affordable rental accommodation, massive increases in house prices and billions of dollars in tax revenue forsaken.For some reason, critics of negative gearing don't believe it is right that investors can claim interest on loans used to fund investment purchases. There is nothing special in the tax legislation that allows interest on investment loans to be tax deductible.One of the major principles of Australian taxation is costs necessarily incurred in earning income are tax deductible. Where a loan is required to buy an income-producing asset, whether it is a rental property or machinery, the interest on the loan is tax deductible.If the interest cost, combined with the other costs associated with the investment, produces a loss, the investment is classed as being negatively geared.This ability to claim interest as a tax deduction is not peculiar to Australia and is a basic tenet of many tax systems, including those in Britain, Canada and the US.It is not a coincidence that the last time the banning of tax benefits from negative gearing was considered here was under a Labor government. In July 1985, the Hawke/Keating government removed the tax benefits from negative gearing of rental properties.This was done by limiting the tax deduction for interest up to the value of the income produced from a property. Any excess interest that produced a loss was carried forward and added to the property's purchase cost.The decision to implement this ban made it a big candidate for the winner of "it seemed like a good idea at the time" awards. Banning tax deductions for negative gearing losses, coupled with the introduction of capital gains tax in September 1985, resulted in a shortage of rental accommodation and led to an increase in rents.The decision was eventually reversed by the Hawke/Keating government only two years later. Not only had the stock of rental properties dried up, but the building industry was in big decline and further action had to be taken.In addition to reinstating the tax deduction for negative gearing losses, the government introduced a tax deduction for the cost of building income-producing property.Initially the deduction applied only to business income-producing properties, but when this proved insufficient to revive the building industry, the building cost write-off was extended to residential income-producing properties.It is not a coincidence that the tax benefits associated with the negative gearing of rental properties are once again a target under a Labor government.It is also interesting to note that there are many signs, as was the case in the 1980s, that the building industry is entering a decline.It can be only hoped that the government remembers that "those who cannot learn from history are doomed to repeat it". This will mean looking for other ways to increase tax revenue that won't have the same long-term adverse effects.Hopefully, this will not mean superannuation benefits will yet again be reduced by taxes imposed under a Labor government.