23 Oct 2013

Dispelling mysteries of negative gearing

A recent column generated reader questions about the reasons for Treasury targeting the superannuation tax concessions while remaining silent about the much faster growth of the negative gearing tax provisions.

Because of the lags in the assessment process, ATO statistics are unfortunately delayed for two years. The latest information available is only for 2010-11. But even at that time, it was obvious that the cutbacks in the concessional superannuation caps were increasing negative gearing property investment.

Sixty thousand additional investors joined the ranks of negative gearers taking the number of real estate investors to 1.8 million. Overall, between 2009-10 and 2010-11, gross rental income received by individuals increased by $2.5 billion. Nevertheless gearing losses resulted in overall taxable income from the sector falling by $3 billion to a total loss of $7.8 billion.

Put simply, in 2010-11, $20.7 billion of rental income generated tax losses of $7.8 billion or nearly 20 per cent of the income. This raises the question of why so many investors purchase rental property in order to make a loss.

The answer must be found in the prospect of future capital gains or other objectives of receiving tax assistance to fund a future residence or housing for children or relatives.

The taxation provisions are open ended provided there is compliance with the key rules. These include the purpose of borrowing must be to purchase the property which must be rented out at market rents. There are no restrictions on related party transactions or the future occupation of the property by the owners other than the provision that tax deductions cease when the property is not rented out.

The most popular negative gearing strategy is to borrow on an interest-only basis and to concentrate on paying off the family home where interest costs are not deductible. This helps explain why 67 per cent of individuals with net rental income reported a taxable loss from their rental property in 2010-11. Approximately one third of these people had a taxable income subject to less than 16.5 per cent tax and received a relatively low tax refund.

Interestingly also, in that year the total personal claims for superannuation tax deductions totalled only $4.2 billion. In the following two years, this total deduction is almost certain to fall because of the reductions in the superannuation contribution caps in these two years.

This analysis leads to only one conclusion. Whether under government instruction or not, Treasury is prepared to continue to fund large deductions for investments generating continuing losses while advocating reduced assistance for long-term superannuation savings.

How long this policy position can be sustained will depend on how serious our future budgetary problems become.

The above information has been sourced from The Canberra Times, 20 October 2013




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