Negative Gearing in Australian Taxation: Winners, Losers, and Implications

Australian Taxation 1
Australian Taxation

Australian Taxation 2
Q.1 Why is this tax policy issue significant?
This tax policy is significant since the implementation of such a policy will help the labours to a
great extent. Accordingly, they can avail the benefit of such policy as a result of which their net
tax liability will be directly affected. They are of opinion that such policy if implemented will
lead to an increase in their disposable income i.e., the proportion of the salary amount they
possess for spending towards essential commodity (Austill, 2018).
To understand why negative gearing is a detrimental tax policy one needs to understand how it
works and how that compares to most other tax systems:
In Australia, an investor who incurs an “operating loss” on an investment property (total
expenses exceed the rental income in a given year) can deduct this loss from his/her current
income. Notice that this cannot be done for any other business: an operating loss in any business
is carried forward and offset against future profits before additional profits get taxed. (This is a
point that proponents of negative gearing don’t seem to want to understand.)Negative gearing is
incredibly costly in terms of government revenue lost and is one of the largest government
handouts that is in no way targeted to a particular group that needs government support
(Australian Government, 2017).
Q.2. Who are the key stakeholders and how does this policy affect them?
The key stakeholders likely to affect or influence by this policy includes labor working at
different levels and whose income consists of capital gains. Besides, income tax officers
(assessing officers) are also key stakeholders. Key stakeholders include all those persons whose
will be influenced or get affected either positively or negatively. As such, it is important to
identify key stakeholders so that the success or failure of the concerned policy can be determined

Australian Taxation 3
with ease. This is because key stakeholders are the appropriate person who can give unbiased
opinion and views in relation to any particular policy (Australian taxation office, 2018). It can be
said that this policy will yield positive result or benefit to labor’s working in different business
organizations. On the other hand, it will decrease the net tax liability of workers lowering the
income tax revenue to the Australian Taxation Officer. Thus, it can be said that income tax
collection agency will not get benefit from such policy. Apart from income tax authorities and
labor, it can be also observed that business organization in which such labors are working will
also get influenced.
Labour would limit negative gearing to newly built properties. This means that investing in new
properties becomes (at the margin, and for some) more attractive than purchasing an existing
property, which may increase the supply of newly built properties (primarily apartments) in the
rental market rather than bidding up the prices of existing buildings and apartments(Australian
Government, 2017). Contrary to the opinion, the absence of negative gearing does not mean that
the cost of a mortgage cannot be deducted from the income an investment generates. It still can
(as a carry-forward).
Without negative gearing (as for example in the US tax system and most other countries), the
operating loss would be carried forward as the property investment is treated separate from
current income (as so-called “passive income”). Later, either when the property generates
positive operating income or at the time of sale, the carry-forward loss is deducted from the
proceeds and capital gains taxes are only incurred on the proceeds from the sale net of all
expenses and losses along the way. Labor income in such a system will be taxed according to its
respective tax bracket, i.e., at 45% in this case.

Australian Taxation 4
Q.3. who are the winners and losers in relation to this tax policy?
The effect of the ability to deduct losses from current income depends on the owner’s income
bracket: for an investor in the highest income bracket ($180k+) income is taxed at the margin at
45% (plus Medicare levy and budget repair levy). Thus, $1000 of “negatively geared” operating
loss saves the investor $450 in income tax(Austill.,2018). Notice that the investor then still is left
with a net loss of $550. Of course the investor expects to earn this loss back in the long run,
primarily through the appreciation of the property, which is taxed at the time of sale at a
concessionary capital gains tax rate (CGT) of 22.5%, provided s/he is still in the top income
bracket at the time of sale—potentially less if s/he is retired or otherwise in a lower income
bracket at the time of sale. So when the operating loss is later recovered as a $1000 capital gain,
the investor only pays $225 in tax and has in effect converted his or her income tax rate from
45% (the intended marginal income tax rate) into the long-term capital gains tax rate of 22.5%
for the amount of the $1000. In addition the investor benefits from deferring the tax liability until
the sale of the property, which amounts to an interest free loan in the amount of the original tax
due, worth [(1+r)T−1]×$450[(1+r)T−1]×$450, or $280 (for an interest rate of 5% and 10 years
until selling the property).
 Distortion of the housing market, in a couple of ways:
a. Those who benefit the most from negative gearing at the margin (i.e., high-
income, mortgage financed investors) are willing to pay a higher price for a given property that
others who don’t benefit (i.e., someone who wants to occupy the property themselves—which
does not attract the negative-gearing benefit—or someone in a lower income bracket).
Beneficiaries of negative-gearing can, therefore, out-bid the non-beneficiary at an auction, all
else equal(Australian taxation office, 2018).