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Negative gearing: What is it and why is it controversial?

As federal parliament debates potential changes to tax concessions known as negative gearing, we take a closer look at what it is and why we should care?

Negative gearing has been a political hot potato for years but has come back into focus, as federal parliament debates tweaking the system to help first-home buyers get onto the property ladder.

Under the "help-to-buy" scheme, those eligible would be able to pay a 2 per cent home deposit, while the government would cover 40 per cent of the home’s cost, effectively becoming a co-owner, with purchasers buying back their stake later on.

In exchange for their support, The Greens demanded tax discount limits for property investors – a system known as "negative gearing". This has the potential to upset a lot of wealthy people.

Suburban Australian house from above, some subject to negative gearing.
Negative gearing has been the subject of fierce debate recently. (Source: Getty)

But what actually is it? Yahoo Finance has the answers to all your burning questions.

What is negative gearing and how does it work?

Negative gearing is where costs associated with an asset, such as a house, unit, shares or other investments, are greater than the income earned from owning it.

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Although knowing you're going to make a loss on an investment may not make sense, one of the advantages of negative gearing is that Australia provides concessions on capital gains tax – which is the tax you pay on profits from selling assets, including property, shares and crypto.

Under Australian tax laws, only 50 per cent of the increase in the value of the asset when sold is subject to capital gains tax, as long as it has been owned for more than 12 months.

Owning an asset such as an investment property is viewed as an income under these laws, meaning that by negative gearing, individuals can deduct their losses when they do their tax returns.

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What does capital gains tax have to do with it?

"While making a loss on an investment property or shares might initially seem counterintuitive, some people are willing to do this in the expectation that the capital gain when they sell the asset will more than offset that loss," the Treasury info sheet on negative gearing explains.

Because housing in Australia can rapidly increase in value, investors can make large profits from “flipping” properties – buying homes cheaply, renovating them and renting them out before selling them.

However, there are also plenty of 'mum and dad' investors and owners who buy property to rent out, having a tenant covering their mortgage repayments, while they claim expenses such as council tax, strata or body corporate fees and other associated costs.

Who benefits and why is it controversial?

In the 2021-22 financial year, a total of 1.1 million Aussies had negatively geared properties, with most of the tax concessions going to high-income investment-property owners, according to the Treasury.

“So, the benefits of negative gearing are that any time you borrow money to invest, you are able to claim all of the interest and related investment costs as a tax deduction to offset your other taxable income and ultimately pay less tax,” financial adviser Ben Nash, founder of Pivot Wealth, told Yahoo Finance.

Financial adviser Ben Nash pictured smiling at the camera.
Financial adviser Ben Nash, founder of Pivot Wealth, explained the benefits of negative gearing to Yahoo Finance. (Source: Supplied)

“The reason that it's seen as controversial in some circles is because of the fact that people see it as tax benefits that benefit people that do already have money, and because there are a lot of people that don't own investment properties and don't have significant investments.

"They see that as breaks for the rich, essentially.”

$8.5 billion cost to Aussie taxpayers?

“The cost to Australian taxpayers of negative gearing in the 2021-22 financial year is $8.5 billion as a result of those benefits, but that is forecast to increase to over $20 billion in the year ahead. So, it does come with a pretty significant price tag,” Nash, who wrote Replace Your Salary By Investing, explained.

“There is though also a flip side in that there's a benefit to taxpayers. And I suppose it talks to the reason why negative gearing exists in the first place – that it ultimately leads to tax breaks that are designed to incentivise people to invest and build their own wealth. And when people are more wealthy, they are less reliant on government benefits.”

A pen lies on top of paperwork near a calculator and piles of Australian currency.
In the 2021-22 financial year, a total of 1.1 million Aussies had negatively geared their properties. (Source: Getty)

What's the chatter behind changing it?

“The talk of changing the negative gearing rules is in line with the controversial angle, particularly with the Labor government, who typically push the message of being supportive for working-class people looking to get ahead,” Nash told Yahoo Finance.

“The negative gearing benefits are seen as a benefit that does benefit more higher-income earners and higher-wealth-position individuals. So, there's talk of reducing some of those benefits to then balance it out for people that are still at the earliest stages of their wealth-building.”

However, considering the potential political cost attached to tweaking or scrapping the system - due to the $8.5 billion of benefits enjoyed by property owners each year - Nash said any changes would upset a lot of people.

“On the flip side though, there are a lot of people that aren't getting any benefits from these that I'm sure would be quite happy to see some of those benefits redistributed as well,” he told Yahoo Finance.

“It's a bit of a moving target. But, given the budget situation that we're in and the economic situation, it's pushing the government to look at the avenues that they can use to bolster the budget bottom line to support the economy and the Australian people as well.”

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