The Negative of Gearing

Negative gearing is great – just ask anyone who knows anything about money, or anyone who thinks they know. Negative gearing is also not properly understood by the general public.

Basically it’s a situation with investing where you borrow money to purchase an asset (like a house) and have to pay more to the bank in interest than the money you are receiving in income (like rent from your tenants). Australian tax laws allow you to effectively claim a tax deduction for the difference, and as every Aussie knows, tax deduction = good. But what’s good for an individual might not be good for society.

Leaving aside the fact that negative gearing can totally ruin you financially if you don’t have the right income to support it, negative gearing has been blamed for helping to push up the cost of housing and creating a larger gap between rich and poor. One reason for this is because there is no limit to the amount an individual can negatively gear. Why not?

I reckon if the federal government had the balls, they would take a look at the negative gearing sacred cow and change it, gradually, over a number of years to make the system fairer. Currently there is no limit to the number of properties you can have negatively geared and claiming tax deductions on in your annual tax return. I reckon there should be a maximum introduced of, say, 18 properties (yeah, a few individuals have an enormous number of properties under their belt). The next year the number should drop by one and keep falling by one per year over 15 years so the maximum number of properties that can be negatively geared by anyone is three.

I’m not saying you should not be allowed to own more than three investment properties, just that you can’t claim tax deductions on the interest of the loans of more than three. Introducing a change over a long time period would not adversely affect the property market or the average Joe. The super rich would hate it, especially if the system was widened to take into account negative gearing on shares and managed funds as well.

If the average Aussie property is deemed to be worth $475,000, that’s a good place to start for the equivalent amount of shares or managed funds that can be negatively geared (multiplied by 18 for the first year, 17 for the second, etc.). Lowering the amount that really wealthy high income earners can claim on their tax makes the whole tax system fairer for all of us.

Another way of bringing house prices down to more sustainable levels is to increase supply by encouraging new houses to be built. Allowing negative gearing only on new houses, or properties which have been vacant for 12 months or more, would see more properties available for renters without pushing up the prices of existing dwellings. But introducing a sudden shock like that into the tax system would spell the end of the political party that did it.

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