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Negative gearing in Australia
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Liquid error: wrong number of arguments (given 1, expected 2)
'''Negative gearing in Australia''' deals with the laws in [[Australia]]n tax system that impact on [[negative gearing. Negative gearing can arise in a number of contexts. For example, with [[real estate]] investments, it arises when [[rental income]] is less than [[mortgage loan]] interest costs, and with [[Share (finance)|shares]], when [[dividend]] income is less than the interest costs on a [[margin (finance)|margin loan]].
==General==
For income tax purposes, [[Australia]] allows the offsetting of negative gearing, ie., the application of property losses arising from negative gearing, against other types of income, such as wage or business income, with only a few limits or restrictions.<ref name=":5" /> Negative gearing by property investors reduced personal income tax revenue in Australia by $600 million in the 2001/02 tax year, $3.9 billion in 2004/05 and $13.2 billion in 2010/11.Liquid error: wrong number of arguments (given 1, expected 2)
Negative gearing continues to be a controversial political issue in Australia and was a major issue during the [[2016 Australian federal election]] and the [[2016 Australian federal election]], during which the [[Australian Labor Party]] proposed restricting but not eliminating negative gearing and to halve the capital gains tax discount to 25%.<ref name=":4">Liquid error: wrong number of arguments (given 1, expected 2)</ref> Analysis found that negative gearing in Australia provides a greater benefit to wealthier Australians than the less wealthy.<ref>Liquid error: wrong number of arguments (given 1, expected 2)</ref>
[[Treasurer of Australia|Federal Treasurer]] at the time, [[Scott Morrison]], in defence of negative gearing, cited tax data that showed that numerous middle income groups (he mentioned teachers, nurses, and electricians) benefit in larger numbers from negative gearing than finance managers.<ref name=":5">Liquid error: wrong number of arguments (given 1, expected 2)</ref> (The raw numbers do not show the extent to which different professional groups benefit.)
==History==
Traditionally, Australian taxpayers have been allowed to negatively gear their investment properties, in the strict sense of investing in property at an initial loss. Negative gearing was restricted by a prohibition on the transfer of contingent property income and the property losses could not offset income from labour.<ref>[https://ift.tt/1SzdPO6 Avoidance, Evasion and Reform: Who Dismantled and who's rebuilding the Australian Income Tax System]</ref> It is assumed this applied to losses as well as income, but this is unclear in the [[Income Tax Assessment Act 1936]].<ref>[https://ift.tt/1mhjmsA INCOME TAX ASSESSMENT ACT 1936]</ref>
A common method of bypassing the restrictions on property losses offsetting income from labour was to convert such income into another form through the use of partnerships and other legal mechanisms. As a result, this restriction may not have been significant.Liquid error: wrong number of arguments (given 1, expected 2) A partnership, trust or similar legal mechanism allowed an individual, or individuals, to pool their incomes and losses, thus allowing them to offset property losses against other incomes. This option was not available to individuals who derived their income from wages.
In 1983, the [[Victoria (Australia)|Victorian]] Deputy Commissioner of Taxation briefly denied Victorian property investors the deduction for interest in excess of the rental income, so losses could not be transferred nor moved to a future tax year. That ruling was quickly over-ruled by the federal tax commissioner.<ref></ref>
in 1985, under the [[Australian Labor Party]] [[Hawke government]], negative gearing rules were changed so that property losses were no longer quarantined and instead could offset wage income. Six months later, following the tax summit in July 1985, the Hawke government undid this change, once more quarantining negative gearing interest expenses on new transactions so that they could be claimed only against rental income, not other income. (Any excess loss could be carried forward to offset property income in later years.)<ref name=":4" /> That ensured that at personal level and, more importantly, at a national level, property losses would not be subsidised by income from personal exertion. In applying the formula, all previous governments thereby isolated and consequently discouraged capital speculation being subsidised from the general income tax receipts pool.
In addition, a [[capital gains tax]] (CGT) was introduced in Australia on 20 September 1985. While a separate tax, it is often associated with negative gearing.
The Hawke government's reversion to the earlier system in which property losses could not offset income from labour was unpopular with property investors. These investors claimed this reversion had caused investment in rental accommodation to dry up and rents to rise substantially. This was unsupported by evidence other than localised increases in real rents in both [[Perth]] and [[Sydney]], which also had the lowest vacancy rates of all capital cities at the time.<ref name=":2">Liquid error: wrong number of arguments (given 1, expected 2)</ref>
However, in July 1987, after lobbying by the property industry, the Federal Labor government with [[Paul Keating]] as its Treasurer, reversed its decision once more, allowing negative gearing losses to be applied against income from labour.
==Taxation==
Australian tax treatment of negative gearing is as follows:
* Interest on an investment loan for an income producing purpose is fully deductible if the income falls short of the interest payable. The shortfall can be deducted for tax purposes from income from other sources, such as the wage or salary income of the investor.
* Ongoing maintenance and small expenses are similarly fully deductible.
* Property fixtures and fittings are treated as plant, and a deduction for [[depreciation]] is allowed based on effective life. When they are later sold, the difference between actual proceeds and the written-down value becomes income or further deduction.
* Capital works (buildings or major additions, constructed after 1997 or certain other dates) attract a 2.5% per annum capital works deduction (or 4% in certain circumstances). The percentage is calculated on the initial cost (or an estimate thereof) and can be claimed until the cost of the works has been completely recovered. The investor's cost base for capital gains tax purposes is reduced by the amount claimed.
* On sale, or most other methods of transfer of ownership, capital gains tax is payable on the proceeds minus cost base (excluding items treated as plant above). A net capital gain is taxed as income, but if the asset was held for one year or more, the gain is first discounted by 50% for an individual, or a third for a superannuation fund. (The discount began in 1999, prior to which an indexing of costs and a stretching of marginal rates applied instead.)
The tax treatment of negative gearing and capital gains may benefit investors in a number of ways, including:
*Losses are deductible in the financial year they are incurred and provide nearly immediate benefit.
*Capital gains are taxed in the financial year when a transfer of ownership occurs (or other less common triggering event), which may be many years after the initial deductions.
*If it is held for more than twelve months, only 50% of the capital gain is taxable.<ref></ref>
*Transfer of ownership may be deliberately timed to occur in a year in which the investor is subject to a lower marginal tax rate, reducing the applicable capital gains tax rate compared to the tax rate saved by the initial deductions.
However, in certain situations the tax rate applied to the capital gain may be higher than the rate of tax saving because of initial deductions such as for investors who have a low marginal tax rate while they make deductions but a high marginal rate in the year the capital gain is realised.
In contrast, the tax treatment of real estate by [[owner-occupier]]s differs from investment properties. Mortgage interest and upkeep expenses on a private property are not deductible, but any capital gain (or loss) made on disposal of a primary residence is tax-free. (Special rules apply on a change from private use to renting or vice versa and for what is considered a main residence.)
==Arguments for and against==
Liquid error: wrong number of arguments (given 1, expected 2)
Liquid error: wrong number of arguments (given 1, expected 2)
The economic and social effects of negative gearing in Australia are a matter of ongoing debate. Those in favourLiquid error: wrong number of arguments (given 1, expected 2) of negative gearing argue:
* Negatively-geared investors support the private residential tenancy market, assisting those who cannot afford to buy, and reducing demand on government [[public housing]].
* Investor demand for property supports the building industry, creating [[employment]].
* Tax benefits encourage individuals to invest and save, especially to help them become self-sufficient in [[retirement]].
* Startup losses are accepted as deductions for business and should also be accepted for investors since investors will be taxed on the result.
* Interest expenses deductible by the investor are income for the lender so there is no loss of tax revenue.
* Negatively-geared properties are running at an actual loss to the investor. Even though the loss may be used to reduce tax, the investor is still in a net worse position compared to not owning the property. The investor is expecting to make a profit either when the net rental income grows over time and exceeds the interest cost, or on the capital gain when the property is sold, or both. After sale, the treatment of the capital gain income is favoured by the tax system since the only half of the capital gain is assessed as taxable income if the investment is held for at least 12 months (before 2000–2001, only the real value of the capital gain was taxed, which had a similar effect). From that perspective, distortions are generated by the 50% discount on capital gains income for income tax purposes, not negative gearing.
CriticsLiquid error: wrong number of arguments (given 1, expected 2) of negative gearing argue:
* It encourages over-investment in residential property, which is an economic distortion.
* Investors inflate the residential property market, making it less affordable for first home buyers or other owner-occupiers.
* In 2007, nine out of ten negatively geared properties in Australia were existing dwellings so the creation of rental supply comes almost entirely at the expense of displacing potential owner-occupiers. Thus, if negative gearing is to exist, it should be applied only to newly constructed properties.
* It encourages [[Speculation|speculators]] into the property market, such as in the [[Australian property bubble]] that began in the mid-1990s, partly the result of increased availability of credit that occurred following the entry of non-bank lenders into the Australian mortgage market.
* Tax deductions and overall benefits accrue to those who already have high incomes, which will make the rich investors even richer and the poorer population even poorer, possibly creating and prolonging a social divide between socio-economic classes.
* Tax deductions reduce government revenue by a significant amount each year, so non-investors are subsidising investors and the government is less able to provide other programs.
* Business expenses (including interest payments) should be deductible against current or future income from that business, not against other forms of current income. Even if the tax code did not allow negative gearing offsets, the cost of operating the rental property (including interest payments) will be deductible from future net rental income or will reduce the capital gains tax at the time of sale of the property.
==Effect on rent prices==
The view that the temporary removal of negative gearing between 1985 and 1987 caused rents to rise has been challenged by Chief Economist of the [[Australia and New Zealand Banking Group]] Saul Eslake, who has been quoted as saying: <blockquote>It's true, according to Real Estate Institute data, that rents went up in Sydney and Perth. But the same data doesn't show any discernible increase in the other state capitals. I would say that, if negative gearing had been responsible for a surge in rents, then you should have observed it everywhere, not just two capitals. In fact, if you dig into other parts of the REI database, what you find is that vacancy rates were unusually low at that time before negative gearing was abolished.<ref>Liquid error: wrong number of arguments (given 1, expected 2)</ref></blockquote>Eslake is referring to changes in inflation-adjusted rents (i.e., when [[Consumer price index|CPI]] inflation is subtracted from the nominal rent increases). These are also known as real rent changes.<ref name=":2" /> Nominal rents nationally rose by over 25% during the two years that negative gearing was quarantined. They rose strongly in every Australian capital city, according to the official [[Australian Bureau of Statistics|ABS]] CPI data.<ref>https://ift.tt/33fh5vf> However, as nominal changes include inflation, they provide a less clear picture of how rents changed in effect, and of how changes such as disallowing property losses to offset other types of income affect rent.<ref name=":2" />
Additionally, it is difficult to assess the impact no longer allowing such deductions had during those two years, given that these deductions had only been allowed for six months prior to their disallowance in July 1985.
An ABC Fact check report, posted on the 3rd of March 2016 and titled "[https://ift.tt/1Jp4tBm Fact check: Did abolishing negative gearing push up rents?]" provided the following, after inflation, rental cost changes, during the period negative gearing was abolished. (Rounded to whole numbers and listed by size of city). Sydney +2% to +4%, Melbourne +2% to 0%, Brisbane -3% to -4%, Perth 0% to +6% and Adelaide +1% to -3%. All values have the effects of inflation removed, which in 1986 was [https://ift.tt/2NbzhQQ 9.18%].
As a comparison with house pricing, the [https://ift.tt/1MCJcpk median house price] in Sydney rose from $98000, in 1985, to $120025, in 1986, or after inflation, by 12.18%. In Brisbane the medium house price moved from $61550 to $63000, in the same period, or an after inflation, a change of -6.25%. The median unit price in Sydney moved from $70500 to $72300, in the same period. An after inflation change of -6.07%. In brisbane the after inflation change for units was -0.05%.
==Effect on housing affordability==
[[File:20100517 Australian House Price Index 1986 - 2009.pdf|thumb|350px|right|Chart 1: House Price Index and CPI. Source ABS]]
In 2003, the [[Reserve Bank of Australia]] (RBA) stated in its submission to the [[Productivity Commission]] First Home Ownership Inquiry:
<blockquote>there are no specific aspects of current tax arrangements designed to encourage investment in property relative to other investments in the Australian tax system. Nor is there any recent tax policy initiative we can point to that accounts for the rapid growth in geared property investment. But the fact is that when we observe the results, resources and finance are being disproportionately channelled into this area, and property promoters use tax effectiveness as an important selling point.<ref name=":3"></ref></blockquote>
They went on to say that "the most sensible area to look for moderation of demand is among investors", and that:
<blockquote>the taxation treatment in Australia is more favourable to investors than is the case in other countries. In particular, the following areas appear worthy of further study by the Productivity Commission:
::i. ability to negatively gear an investment property when there is little prospect of the property being cash-flow positive for many years;
::ii. the benefit that investors receive by virtue of the fact that when property depreciation allowances are "clawed back" through the capital gains tax, the rate of tax is lower than the rate that applied when depreciation was allowed in the first place.
::iii. the general treatment of property depreciation, including the ability to claim depreciation on loss-making investments.<ref name=":3" /></blockquote>
[[File:Investor Lending - new vs existing to Feb 2010.pdf|thumb|350px|right|Chart 2: Investor Lending – New construction vs Existing property. Source ABS, RBA]]
In 2008, the report of the Senate Select Committee on Housing Affordability in Australia echoed the findings of the 2004 Productivity Commission report. One recommendation to the enquiry suggested that negative gearing should be capped: "There should not be unlimited access. Millionaires and billionaires should not be able to access it, and you should not be able to access it on your 20th investment property. There should be limits to it."<ref></ref>
A 2015 report from the Senate Economics References Committee argues that, while negative gearing has an influence on housing affordability, the primary issue is a mismatch between supply and demand.<ref></ref> A submission to this committee from the Department of Social Services stated that:<blockquote>[while] demand for housing has increased significantly over the last 30 years, the supply of new dwellings has not responded, with average annual completions of new dwellings remaining around 150,000 since the mid-1980s.</blockquote>The effect of negative gearing on the supply side of dwelling construction is difficult to pin down. Commentary from Eslake and others has highlighted the preponderance of negatively-geared purchases in established suburbs where the probability of a lightly-taxed capital gain exists, challenging the idea that negative gearing leads to substantial amounts of new construction. Many economistsLiquid error: wrong number of arguments (given 1, expected 2) have commented extensively on the tax subsidy being made available to speculative buyers in competition against homebuyers, who have no such tax subsidy, leading to significant social dislocation.
Additionally, the tax subsidy feeding into higher home prices adds to the wealth of those taking advantage of negative gearing. The process that crowds out domestic home owners by pushing up the price of housing also makes the successful user of negative gearing more asset rich due to the increase in land value. This allows these people to borrow further funds against equity in the previously acquired properties, resulting in further acquisitions under tax subsidy. This process can raise prices and thereby make it harder for people who wish to buy a house as an owner-occupier.
==See also==
* [[Taxation in Australia]]
==References==
[[Category:Income tax in Australia]]
[[Category:Taxation in Australia]]
'''Negative gearing in Australia''' deals with the laws in [[Australia]]n tax system that impact on [[negative gearing. Negative gearing can arise in a number of contexts. For example, with [[real estate]] investments, it arises when [[rental income]] is less than [[mortgage loan]] interest costs, and with [[Share (finance)|shares]], when [[dividend]] income is less than the interest costs on a [[margin (finance)|margin loan]].
==General==
For income tax purposes, [[Australia]] allows the offsetting of negative gearing, ie., the application of property losses arising from negative gearing, against other types of income, such as wage or business income, with only a few limits or restrictions.<ref name=":5" /> Negative gearing by property investors reduced personal income tax revenue in Australia by $600 million in the 2001/02 tax year, $3.9 billion in 2004/05 and $13.2 billion in 2010/11.Liquid error: wrong number of arguments (given 1, expected 2)
Negative gearing continues to be a controversial political issue in Australia and was a major issue during the [[2016 Australian federal election]] and the [[2016 Australian federal election]], during which the [[Australian Labor Party]] proposed restricting but not eliminating negative gearing and to halve the capital gains tax discount to 25%.<ref name=":4">Liquid error: wrong number of arguments (given 1, expected 2)</ref> Analysis found that negative gearing in Australia provides a greater benefit to wealthier Australians than the less wealthy.<ref>Liquid error: wrong number of arguments (given 1, expected 2)</ref>
[[Treasurer of Australia|Federal Treasurer]] at the time, [[Scott Morrison]], in defence of negative gearing, cited tax data that showed that numerous middle income groups (he mentioned teachers, nurses, and electricians) benefit in larger numbers from negative gearing than finance managers.<ref name=":5">Liquid error: wrong number of arguments (given 1, expected 2)</ref> (The raw numbers do not show the extent to which different professional groups benefit.)
==History==
Traditionally, Australian taxpayers have been allowed to negatively gear their investment properties, in the strict sense of investing in property at an initial loss. Negative gearing was restricted by a prohibition on the transfer of contingent property income and the property losses could not offset income from labour.<ref>[https://ift.tt/1SzdPO6 Avoidance, Evasion and Reform: Who Dismantled and who's rebuilding the Australian Income Tax System]</ref> It is assumed this applied to losses as well as income, but this is unclear in the [[Income Tax Assessment Act 1936]].<ref>[https://ift.tt/1mhjmsA INCOME TAX ASSESSMENT ACT 1936]</ref>
A common method of bypassing the restrictions on property losses offsetting income from labour was to convert such income into another form through the use of partnerships and other legal mechanisms. As a result, this restriction may not have been significant.Liquid error: wrong number of arguments (given 1, expected 2) A partnership, trust or similar legal mechanism allowed an individual, or individuals, to pool their incomes and losses, thus allowing them to offset property losses against other incomes. This option was not available to individuals who derived their income from wages.
In 1983, the [[Victoria (Australia)|Victorian]] Deputy Commissioner of Taxation briefly denied Victorian property investors the deduction for interest in excess of the rental income, so losses could not be transferred nor moved to a future tax year. That ruling was quickly over-ruled by the federal tax commissioner.<ref></ref>
in 1985, under the [[Australian Labor Party]] [[Hawke government]], negative gearing rules were changed so that property losses were no longer quarantined and instead could offset wage income. Six months later, following the tax summit in July 1985, the Hawke government undid this change, once more quarantining negative gearing interest expenses on new transactions so that they could be claimed only against rental income, not other income. (Any excess loss could be carried forward to offset property income in later years.)<ref name=":4" /> That ensured that at personal level and, more importantly, at a national level, property losses would not be subsidised by income from personal exertion. In applying the formula, all previous governments thereby isolated and consequently discouraged capital speculation being subsidised from the general income tax receipts pool.
In addition, a [[capital gains tax]] (CGT) was introduced in Australia on 20 September 1985. While a separate tax, it is often associated with negative gearing.
The Hawke government's reversion to the earlier system in which property losses could not offset income from labour was unpopular with property investors. These investors claimed this reversion had caused investment in rental accommodation to dry up and rents to rise substantially. This was unsupported by evidence other than localised increases in real rents in both [[Perth]] and [[Sydney]], which also had the lowest vacancy rates of all capital cities at the time.<ref name=":2">Liquid error: wrong number of arguments (given 1, expected 2)</ref>
However, in July 1987, after lobbying by the property industry, the Federal Labor government with [[Paul Keating]] as its Treasurer, reversed its decision once more, allowing negative gearing losses to be applied against income from labour.
==Taxation==
Australian tax treatment of negative gearing is as follows:
* Interest on an investment loan for an income producing purpose is fully deductible if the income falls short of the interest payable. The shortfall can be deducted for tax purposes from income from other sources, such as the wage or salary income of the investor.
* Ongoing maintenance and small expenses are similarly fully deductible.
* Property fixtures and fittings are treated as plant, and a deduction for [[depreciation]] is allowed based on effective life. When they are later sold, the difference between actual proceeds and the written-down value becomes income or further deduction.
* Capital works (buildings or major additions, constructed after 1997 or certain other dates) attract a 2.5% per annum capital works deduction (or 4% in certain circumstances). The percentage is calculated on the initial cost (or an estimate thereof) and can be claimed until the cost of the works has been completely recovered. The investor's cost base for capital gains tax purposes is reduced by the amount claimed.
* On sale, or most other methods of transfer of ownership, capital gains tax is payable on the proceeds minus cost base (excluding items treated as plant above). A net capital gain is taxed as income, but if the asset was held for one year or more, the gain is first discounted by 50% for an individual, or a third for a superannuation fund. (The discount began in 1999, prior to which an indexing of costs and a stretching of marginal rates applied instead.)
The tax treatment of negative gearing and capital gains may benefit investors in a number of ways, including:
*Losses are deductible in the financial year they are incurred and provide nearly immediate benefit.
*Capital gains are taxed in the financial year when a transfer of ownership occurs (or other less common triggering event), which may be many years after the initial deductions.
*If it is held for more than twelve months, only 50% of the capital gain is taxable.<ref></ref>
*Transfer of ownership may be deliberately timed to occur in a year in which the investor is subject to a lower marginal tax rate, reducing the applicable capital gains tax rate compared to the tax rate saved by the initial deductions.
However, in certain situations the tax rate applied to the capital gain may be higher than the rate of tax saving because of initial deductions such as for investors who have a low marginal tax rate while they make deductions but a high marginal rate in the year the capital gain is realised.
In contrast, the tax treatment of real estate by [[owner-occupier]]s differs from investment properties. Mortgage interest and upkeep expenses on a private property are not deductible, but any capital gain (or loss) made on disposal of a primary residence is tax-free. (Special rules apply on a change from private use to renting or vice versa and for what is considered a main residence.)
==Arguments for and against==
Liquid error: wrong number of arguments (given 1, expected 2)
Liquid error: wrong number of arguments (given 1, expected 2)
The economic and social effects of negative gearing in Australia are a matter of ongoing debate. Those in favourLiquid error: wrong number of arguments (given 1, expected 2) of negative gearing argue:
* Negatively-geared investors support the private residential tenancy market, assisting those who cannot afford to buy, and reducing demand on government [[public housing]].
* Investor demand for property supports the building industry, creating [[employment]].
* Tax benefits encourage individuals to invest and save, especially to help them become self-sufficient in [[retirement]].
* Startup losses are accepted as deductions for business and should also be accepted for investors since investors will be taxed on the result.
* Interest expenses deductible by the investor are income for the lender so there is no loss of tax revenue.
* Negatively-geared properties are running at an actual loss to the investor. Even though the loss may be used to reduce tax, the investor is still in a net worse position compared to not owning the property. The investor is expecting to make a profit either when the net rental income grows over time and exceeds the interest cost, or on the capital gain when the property is sold, or both. After sale, the treatment of the capital gain income is favoured by the tax system since the only half of the capital gain is assessed as taxable income if the investment is held for at least 12 months (before 2000–2001, only the real value of the capital gain was taxed, which had a similar effect). From that perspective, distortions are generated by the 50% discount on capital gains income for income tax purposes, not negative gearing.
CriticsLiquid error: wrong number of arguments (given 1, expected 2) of negative gearing argue:
* It encourages over-investment in residential property, which is an economic distortion.
* Investors inflate the residential property market, making it less affordable for first home buyers or other owner-occupiers.
* In 2007, nine out of ten negatively geared properties in Australia were existing dwellings so the creation of rental supply comes almost entirely at the expense of displacing potential owner-occupiers. Thus, if negative gearing is to exist, it should be applied only to newly constructed properties.
* It encourages [[Speculation|speculators]] into the property market, such as in the [[Australian property bubble]] that began in the mid-1990s, partly the result of increased availability of credit that occurred following the entry of non-bank lenders into the Australian mortgage market.
* Tax deductions and overall benefits accrue to those who already have high incomes, which will make the rich investors even richer and the poorer population even poorer, possibly creating and prolonging a social divide between socio-economic classes.
* Tax deductions reduce government revenue by a significant amount each year, so non-investors are subsidising investors and the government is less able to provide other programs.
* Business expenses (including interest payments) should be deductible against current or future income from that business, not against other forms of current income. Even if the tax code did not allow negative gearing offsets, the cost of operating the rental property (including interest payments) will be deductible from future net rental income or will reduce the capital gains tax at the time of sale of the property.
==Effect on rent prices==
The view that the temporary removal of negative gearing between 1985 and 1987 caused rents to rise has been challenged by Chief Economist of the [[Australia and New Zealand Banking Group]] Saul Eslake, who has been quoted as saying: <blockquote>It's true, according to Real Estate Institute data, that rents went up in Sydney and Perth. But the same data doesn't show any discernible increase in the other state capitals. I would say that, if negative gearing had been responsible for a surge in rents, then you should have observed it everywhere, not just two capitals. In fact, if you dig into other parts of the REI database, what you find is that vacancy rates were unusually low at that time before negative gearing was abolished.<ref>Liquid error: wrong number of arguments (given 1, expected 2)</ref></blockquote>Eslake is referring to changes in inflation-adjusted rents (i.e., when [[Consumer price index|CPI]] inflation is subtracted from the nominal rent increases). These are also known as real rent changes.<ref name=":2" /> Nominal rents nationally rose by over 25% during the two years that negative gearing was quarantined. They rose strongly in every Australian capital city, according to the official [[Australian Bureau of Statistics|ABS]] CPI data.<ref>https://ift.tt/33fh5vf> However, as nominal changes include inflation, they provide a less clear picture of how rents changed in effect, and of how changes such as disallowing property losses to offset other types of income affect rent.<ref name=":2" />
Additionally, it is difficult to assess the impact no longer allowing such deductions had during those two years, given that these deductions had only been allowed for six months prior to their disallowance in July 1985.
An ABC Fact check report, posted on the 3rd of March 2016 and titled "[https://ift.tt/1Jp4tBm Fact check: Did abolishing negative gearing push up rents?]" provided the following, after inflation, rental cost changes, during the period negative gearing was abolished. (Rounded to whole numbers and listed by size of city). Sydney +2% to +4%, Melbourne +2% to 0%, Brisbane -3% to -4%, Perth 0% to +6% and Adelaide +1% to -3%. All values have the effects of inflation removed, which in 1986 was [https://ift.tt/2NbzhQQ 9.18%].
As a comparison with house pricing, the [https://ift.tt/1MCJcpk median house price] in Sydney rose from $98000, in 1985, to $120025, in 1986, or after inflation, by 12.18%. In Brisbane the medium house price moved from $61550 to $63000, in the same period, or an after inflation, a change of -6.25%. The median unit price in Sydney moved from $70500 to $72300, in the same period. An after inflation change of -6.07%. In brisbane the after inflation change for units was -0.05%.
==Effect on housing affordability==
[[File:20100517 Australian House Price Index 1986 - 2009.pdf|thumb|350px|right|Chart 1: House Price Index and CPI. Source ABS]]
In 2003, the [[Reserve Bank of Australia]] (RBA) stated in its submission to the [[Productivity Commission]] First Home Ownership Inquiry:
<blockquote>there are no specific aspects of current tax arrangements designed to encourage investment in property relative to other investments in the Australian tax system. Nor is there any recent tax policy initiative we can point to that accounts for the rapid growth in geared property investment. But the fact is that when we observe the results, resources and finance are being disproportionately channelled into this area, and property promoters use tax effectiveness as an important selling point.<ref name=":3"></ref></blockquote>
They went on to say that "the most sensible area to look for moderation of demand is among investors", and that:
<blockquote>the taxation treatment in Australia is more favourable to investors than is the case in other countries. In particular, the following areas appear worthy of further study by the Productivity Commission:
::i. ability to negatively gear an investment property when there is little prospect of the property being cash-flow positive for many years;
::ii. the benefit that investors receive by virtue of the fact that when property depreciation allowances are "clawed back" through the capital gains tax, the rate of tax is lower than the rate that applied when depreciation was allowed in the first place.
::iii. the general treatment of property depreciation, including the ability to claim depreciation on loss-making investments.<ref name=":3" /></blockquote>
[[File:Investor Lending - new vs existing to Feb 2010.pdf|thumb|350px|right|Chart 2: Investor Lending – New construction vs Existing property. Source ABS, RBA]]
In 2008, the report of the Senate Select Committee on Housing Affordability in Australia echoed the findings of the 2004 Productivity Commission report. One recommendation to the enquiry suggested that negative gearing should be capped: "There should not be unlimited access. Millionaires and billionaires should not be able to access it, and you should not be able to access it on your 20th investment property. There should be limits to it."<ref></ref>
A 2015 report from the Senate Economics References Committee argues that, while negative gearing has an influence on housing affordability, the primary issue is a mismatch between supply and demand.<ref></ref> A submission to this committee from the Department of Social Services stated that:<blockquote>[while] demand for housing has increased significantly over the last 30 years, the supply of new dwellings has not responded, with average annual completions of new dwellings remaining around 150,000 since the mid-1980s.</blockquote>The effect of negative gearing on the supply side of dwelling construction is difficult to pin down. Commentary from Eslake and others has highlighted the preponderance of negatively-geared purchases in established suburbs where the probability of a lightly-taxed capital gain exists, challenging the idea that negative gearing leads to substantial amounts of new construction. Many economistsLiquid error: wrong number of arguments (given 1, expected 2) have commented extensively on the tax subsidy being made available to speculative buyers in competition against homebuyers, who have no such tax subsidy, leading to significant social dislocation.
Additionally, the tax subsidy feeding into higher home prices adds to the wealth of those taking advantage of negative gearing. The process that crowds out domestic home owners by pushing up the price of housing also makes the successful user of negative gearing more asset rich due to the increase in land value. This allows these people to borrow further funds against equity in the previously acquired properties, resulting in further acquisitions under tax subsidy. This process can raise prices and thereby make it harder for people who wish to buy a house as an owner-occupier.
==See also==
* [[Taxation in Australia]]
==References==
[[Category:Income tax in Australia]]
[[Category:Taxation in Australia]]
November 04, 2019 at 01:08PM
