Negative gearing is a popular investment strategy in Australia, but it’s also a term that often comes up in the media, particularly when there’s an election looming, like right now.
Let’s take a look at what it means, what capital gains tax (CGT) is and why you need to know about these terms if you plan to invest in property.
What is negative gearing?
Negative gearing is where the expenses associated with owning an asset such as an investment property (including interest expenses) are greater than the income earned from the asset.
So, say the rental return on your investment property is $2,800 a month, but your investment property costs (e.g. your home loan interest, property management fees, insurance, maintenance costs, etc.) set you back $3,200 a month. That means you’re negatively geared.
Investors who are negatively geared can deduct the losses they incur against other income, including salary and wages.
Positive gearing is the opposite – the rental returns exceed the costs of owning the property. Neutral gearing is when an investment property’s income and expenses are pretty much equal.
Why is negative gearing attractive to investors?
In Australia, it’s estimated two in three rentals (just over one million) lose money. So, why would anyone want an asset that’s making them a loss?
Some investors are willing to negatively gear their properties in the hope that the capital gain (the sale price minus the cost of the asset) when they sell the property will more than offset those losses.
The ability to deduct losses and reduce one’s taxable income, thereby lowering the amount of income tax you pay, is another real drawcard for many investors, particularly those in higher tax brackets.
What is capital gains tax (CGT)?
CGT is the tax you pay on profits when you sell the property. Although it’s referred to as ‘capital gains tax’, it’s part of your income tax. It’s not a separate tax.
If you’ve owned the property for more than 12 months, you can reduce your capital gain by 50%. This is referred to as the capital gains tax discount.
Why has negative gearing been in the news?
There have been calls to overhaul negative gearing and the CGT discount for years, as opponents believe they exacerbate the housing crisis and favour higher income earners.
The Henry Tax Review conducted by Treasury in 2010, for example, recommended a 40% capital gains discount, which was not adopted.
More recently, the Australian Council of Social Service (ACOSS) called for reforms to negative gearing and capital gains tax discounts.
The ACOSS report, Homes for living, not wealth creation, found the wealthiest 10 per cent of households hold two thirds of the value of investment property.
ACOSS called on the next government to halve the CGT discount to 25% over five years, reducing it by 5% per year; restrict negative gearing for new investments so that investment losses can only be offset against investment income rather than wages; and phase out negative gearing for existing investments over five years.
So, what are the major parties saying in this election?
Greens leader Adam Bandt has flagged he will push for negative gearing changes if his party holds the balance of power after the upcoming election.
Labor went to the 2016 and 2018 elections with a proposal to overhaul negative gearing. However, it’s not on the government’s reform agenda at present.
“We have no plans to do anything on negative gearing, because we don’t think that is the main issue. The issue is supply, and that’s what we’re tackling,” Anthony Albanese recently said.
Opposition leader Peter Dutton has “guaranteed” the Coalition would leave negative gearing and the capital gains tax concession unchanged should it win the upcoming election.
Ready to buy an investment property?
Before making any property investment decisions, it’s always wise to speak to your tax advisor or a financial planner.
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