A recent study by the University of Melbourne has raised questions about negative gearing, after it showed home ownership would rise if the investment strategy was abolished.
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Independent economist Saul Eslake sat down on Wednesday with Fairfax Tasmania reporter Stefan Boscia to chat about the divisive issue.
STEFAN BOSCIA: What is negative gearing?
SAUL ESLAKE: Negative gearing is a vehicle for people to defer and permanently reduce the tax they pay.
If you buy a $300,000 flat and borrow $200,000 to purchase it at an interest rate of 5 per cent, and you spend $10 000 per annum on interest, but only get $8000 in rent, then you can offset $2000 against your wage and salary for tax purposes, thus reducing your amount of tax you have to pay in that financial year.
When you sell the investment – presumably at a profit – you pay tax on the capital gain at half the rate you would pay on your ordinary income.
SB: What type of property owner would employ negative gearing?
SE: Overwhelmingly it’s people in high income occupations who are likely to have negatively geared property investments.
Someone who is in the top tax bracket – who represent 3 per cent of all Australian taxpayers – is much more likely to be a negatively geared landlord than someone earning a taxable income of less than $80,000 per annum.
SB: What are the rates of negative gearing in Tasmania?
SE: Much less than in other states, because a modest proportion of Tasmanian income-earners are in the top tax bracket than other states in Australia as a whole.
Roughly speaking, about 15 per cent of Australian taxpayers are negatively geared landlords, but the proportion in Tasmania is about 9 per cent.
SB: What has been the effect of negative gearing over the last decade in Australia and in Tasmania?
SE: The change to the capital gains tax regime [in 1999] made negative gearing a much more attractive strategy for investors.
Since the late 1990s, the dwellings owned by investors has increased, the proportion owned by homeowners has declined, the proportion of housing finance going to investors has risen from 18 per cent in the early 1990s to more than 50 per cent in 2014-15.
In my view, there is little doubt the growing presence of negatively geared investors of the capital cities in Australia has been a factor driving up prices – not the only one, but an important one – and a factor driving the decline of home ownership rates.
In Tasmania, negatively geared investors have had less of an influence, that’s one reason why property prices hasn’t risen as much as in other states.
It’s also one reason why the home ownership rate is higher than any other state or territory.
SB: What would happen to property prices if negative gearing was restricted by a future government?
SE: For me, the impact of abolishing negative gearing would be to remove an important source of pressure on upward house prices over the last 25 years.
If it were true that the abolition of negative gearing would prompt landlords to sell their properties, they would be selling to would-be home buyers who would be able to live in homes of their own, rather than renting properties from negatively-geared landlords.