ABC facts checks claims about negative gearing
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:
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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]
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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.
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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.