Money
Issue No. 41 - June/July 2008
Negative gearing: make it fair
by John Rawson
In recent years debate over negative gearing
has evoked equally passionate responses from those
who want the practice abolished and those who want
it retained.
Having been a regular commentator on tax reform for the past 20 years, I want to put forward a suggestion for changing tax law to make the tax outcomes fairer.
Before doing so it is necessary to explain what benefits arise under the current law.
Negative gearing is very popular among investors, especially those who invest in rental properties. Negative gearing means cash outflows exceed cash inflows – which ordinarily is not a sustainable business model.
So there must be something else that makes it all worthwhile. The reason is that our tax laws allow an investor to offset the excess cash outflows - usually interest deductions and property holding costs - against the investor’s other assessable earnings - typically
salary income.
The result is an investor on the top marginal tax rate of 46.5% can reduce the tax they would otherwise pay on their salary income by almost half of the excess cash outflow from their property. But that only explains half of the story.
The other half of the benefit comes when an investor sells a property. Our current tax laws apply a concessional rate of tax to capital gains – in fact they are taxed 50% of the rate of your ordinary income if you have owned the property for more than one year. This acts as a strong incentive to have gains taxed within the capital gains tax regime because your tax liability is halved.
The overall result is that over the time an investor holds a property that is negatively geared they save tax at the rate of 46.5% and only pay it at the end at half that rate - 23.25%.
Should the Federal Government conduct a “root and branch” reform of Australia’s tax system the following idea could be considered.
Negative gearing on all types of investments
has ...
