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The Negative Gearing Debate Never Loses Steam

government on negative gearingAn article on the website sheds light on the government’s stance on negative gearing and discusses whether it should be scrapped or kept as it is. While the government could save a ballpark figure of $12 billion by abolishing negative gearing, they are in no mood to take the step, given the kind of repercussions the move might have. For all we know, the collective social and economic stimulus might take a beating.

How negative gearing helps

Negative gearing is when you claim mortgage and repair costs associated with property investment as a tax deduction. For example, if your mortgage repayment amounts to $2,700 a month and you rent your property for $475 per week, you will have a rough deficit of $700, to be paid out of your own pocket each month. So, the yearly deficit will amount to roughly $8,400. If you add $800 as cost of yearly repairs, you will be able to claim a tax deduction of $9,200 from the income tax office.

Government’s stance on negative gearing

Australian PM Tony Abbott is relentless. He is pretty clear that the tax break won’t be abolished. He said that the government he leads wants taxes to “be lower, simpler, and fairer” and that’s saying something. After all, there are 1.2 million people in the ‘gearing’ fray and not giving them a chance to offset the “out of pocket” costs through gearing will certainly put him in a precarious situation.

It is a heated debate

The debate continues to be a heated one because no side is prepared to budge. Those in favour of scrapping it feel that it benefits only the rich people, and they present data to drive their point home. They say that 30% of people enjoying gearing earn more than $500,000 annually. There is also data saying that one-third of the tax break money goes to 10% of the richest citizens of Australia.  The opposition bench feels that abolishing gearing will restore parity as it tilts the balance heavily in favour of the rich.

Those who want negative gearing to stay assert that the tax rebate has helped 83,000 clerical workers, 62,000 teachers and child carers and 12,000 working in the emergency service industry. Interestingly, none of those people are close to being rich.

Moreover, if negative gearing is scrapped, there might be a reduction in the purchase of investment property, leading to an upsurge in rents. There are those who contest that the only time gearing was abolished, rental rate had shot up a great deal across capital cities.

This is not entirely correct though. Rents had surely increased between 1985-87, a time that coincided with the scrapping of gearing, but it was a phenomenon witnessed by only Sydney and Perth. To say that it was a pan-nation trend could be incorrect.

You can read the original article here.

Concessional treatment of capital gains

In my opinion, negative gearing should be left where it is and concessional treatment accorded to capital gains should be scrutinised. Rather than taxing capital gains at the full rate and offsetting operating losses against them, we tax only half of the capital gain; and that again at the time of the sale of property. Investors get an added leverage of choosing when to show their capital gain (and they do it when the marginal rate of taxation is lowest).

Put another way, it is not negative gearing, but such treatment of capital gain which increases the gulf between the rich and the not-so-rich.

One parting shot about negative gearing:  Feel free to use it, but keep in mind that it can only be beneficial if the asset in question rises in value over time and can be sold for an amount that fully covers the shortfall.