Negative gearing is a system where the rent earned on a property – after removing other expenses – doesn’t cover the interest on the mortgage. You can then take that loss, and use it to offset other taxable income. It’s a system where you deliberately run what is a effectively a business at a loss, hoping to offset that loss later by selling the property and pocketing capital gains (which will also be tax discounted)
This is a system that is much more likely to be used (and abused) by people with high incomes. That’s because your regular income is going to be reduced – you’ll have less cash in hand because of negative gearing, so you’re only going to do it if you can afford that shortfall.
Like all tax-deduction schemes, it is also a system that favours people with high incomes. That’s because the person earning $250,000 who claims $10,000 in negative gearing losses gets back $4,700, whilst a person earning $80,000 gets back $3,450. That’s just how tax-minimisation schemes work.
Some possible fixes:
tax deductions could work from the bottom end of the tax rate up, rather than the top down. Instead of lowering your taxable income, you effectively raise your tax-free threshold. So, the first $18,800 in tax deductions would be worth $0.19 on the dollar for everyone, and you wouldn’t get to the $0.45 level until you’ve claimed $180,000 in deductions. [This is a personal favourite of mine for fixing a lot of the distortions tax-minimisation causes]
certain tax-deductions – such as negative gearing – could be capped. Work out what, say, 2/3rds of negative gearers claims, and set that as the cap. This immediately removes the worst of the abuse. Hey, that’s what the ALP policy is.
Reduce the capital gains discount applied on the sale of investment property by the amount of negative gearing applied over the life of the asset. This removes the double-dipping: the sale of the property (at a profit) should be used to offset the previously claimed losses.