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.
Frequently Asked Questions about this Article…
What is negative gearing and how does it work for rental property investors?
Negative gearing occurs when the interest and other costs of owning an income‑producing asset, like a rental property, exceed the income it generates. Under Australian tax principles those interest costs are tax deductible because they are expenses necessarily incurred in earning income; if the result is a loss, the investment is classed as negatively geared.
Why are politicians talking about banning negative gearing to raise tax revenue?
The article says the federal government has been looking at broad options to boost tax revenue for a balanced budget, and negative gearing is often raised as a target because critics argue it reduces tax receipts and contributes to housing affordability issues.
Is claiming interest on investment loans a special rule only in Australia?
No. The article notes that allowing interest on loans used to buy income‑producing assets to be tax deductible is a basic feature of many tax systems, including Britain, Canada and the United States.
What happened when negative gearing tax benefits were limited in 1985?
In July 1985 the Hawke/Keating government limited interest deductions to the value of income produced from a property and carried forward any excess interest. The article reports this led to a shortage of rental accommodation, higher rents and a decline in the building industry.
Why did the Hawke/Keating government reverse the 1985 ban on negative gearing?
The government reversed the ban two years later because the policy reduced the stock of rental properties and contributed to a big decline in the building industry. They reinstated deductions for negative gearing losses and introduced a deduction for building income‑producing property to revive construction.
Could banning negative gearing again lead to fewer rental properties and higher rents?
According to the historical example in the article, limiting tax benefits from negative gearing in the 1980s coincided with a drop in rental stock and rising rents, suggesting similar outcomes are possible if the same approach were used again.
Why is negative gearing a recurring target under Labor governments?
The article points out it is not a coincidence that negative gearing has been targeted before and is again under a Labor government—reflecting past policy debates and the party's willingness to consider changes to tax concessions linked to rental investments.
If negative gearing is not changed, what other tax areas might the government consider?
The article warns that if negative gearing is ruled out as a revenue source, the government will need to look for other ways to raise tax revenue that avoid the long‑term adverse effects seen previously—though it cautions against repeating policies that harmed the rental market or construction industry, and expresses hope that superannuation benefits won't be cut.
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