Negative Gearing Policy: Arguments Against

The negative gearing policy discourages the first home buyers from entering the market, results in the increase of rental prices, reduction of government revenue, inefficient allocation of resources and increase of debt levels.

Running head: TAXATION LAW
Taxation Law
Name of the Student
Name of the University
Authors Note
Course ID

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Table of Contents
Part 1 - Question 1 A:.................................................................................................................2
Issues:.........................................................................................................................................2
Rule:...........................................................................................................................................2
Applications:..............................................................................................................................3
Conclusion:................................................................................................................................3
Answer to question 1 B:.............................................................................................................4
Part 2: Policy Based Question:...................................................................................................9
Introduction:...............................................................................................................................9
Argument against the negative gearing:...................................................................................10
Arguments for Negative Gearing:............................................................................................12
Conclusion:..............................................................................................................................13
References:...............................................................................................................................15

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Part 1 - Question 1 A:
Issues:
Is the taxpayer taxable under “section 6-5 of the ITAA 1997” for the profits made
from the sale of block of apartment?
Rule:
Income derived from the sale of property is generally considered as the ordinary
income whether the taxpayer enhances and develops the property with the objective of
generating profit from the activities of development. Taxpayers that are indulged in such
activities are usually held as the property developers. When the property is sold as the portion
of ordinary business course, any incomes derived from sale of the property would be treated
as the taxable income based on the gross proceeds basis under “section 6-5 of the ITAA
1997”1. The “taxation ruling of TR 92/3” states that whether any profit obtained from the
isolated transactions is considered as the earnings under the ordinary meaning is reliant on the
circumstances of the event. A profit from the isolated transactions would be treated as the
ordinary earnings given the purpose of the taxpayers was to enter into such transactions with
the objective of making profit.
The sale of revenue assets results in ordinary income for the taxpayer. The court of
law in “FCT v Whitfords Beach Pty Ltd (1982)” held that the taxpayer taxable for the
profits generated from the sale of land under “section 25 (1)” since its activities represent
performing of the business of land development2. The taxation commissioner explains that
that profit from the isolated transactions would be treated as ordinary earnings under “section
1 Sadiq, Kerrie et al, Principles Of Taxation Law 2018
2 Woellner, R. H et al, Australian Taxation Law 2018

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6-5 of the ITAA 1997” because the profit was made in carrying out the transaction of
commercial in nature.
Applications:
The present case study of Kristie explains that the investment property was bought
with the intention of making profit. Instances obtained suggest that she also sought the
service of professional planner to draft the sketches and plans of proposed apartment. This
represents that Kristie developed the investment property with view of generating income
from the developmental activity. Citing the reference of “FCT v Whitfords Beach Pty Ltd
(1982)” Kristie activities can be referred as property developer and the sale of property
amounts carrying of business of land development3. Kristie entered the transaction with the
objective of making profit. The profit made by Kristie from the sale of apartment block
would be assessable according to the “ordinary concepts” of “section 6-5 of the ITAA
1997”.
Conclusion:
Conclusively, the profit from the sale of apartment block is taxable as ordinary
earnings under “section 6-5 of the ITAA 1997” act.
3 Woellner, Robin, Stephen Barkoczy and Shirley Murphy, Australian Taxation Law 2018 Ebook
28E (OUPANZ, 2018)

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Answer to question 1 B:
The present subject is based on ascertaining whether taxpayer would be held taxable
for the capital gains made from the sale of assets under “Income Tax Assessment Act
1997”.
The capital gains tax is generally applicable to the assets that are acquired or other
events that takes place on or after the 20 September 19854. An individual can make capital
gains or loss if they dispose the business assets through sale, gift of transfer. A business asset
might be the premises, goodwill or rights and licences. An individual is required to include
any sum of capital gains that is made in the income year in their tax return.
The Australian taxation office defines that an individual that owners of the
commercial property are very likely to make the capital gains or capital loss. An individual is
very likely to make the capital gains or capital loss when the commercial property is sold5. If
an individual makes the net capital gains during the income year, the person making such
gains would be held liable for the capital gains tax. The capital gains or the capital loss
represents the difference between cost that an individual obtains and what a person receives
while disposing the property6. Any sum that an individual claim as the tax deductions are
excluded from the cost base of the property.
As obvious in the existing condition of Dave he bought a business premises for
$900,000 and a business goodwill for $100,000. However, due to ill health the business was
sold to Doors RUs for a sum of $2,000,000. The business also purchased the goodwill of
4 Coleman, Cynthia and Kerrie Sadiq, Principles Of Taxation Law 2013
5 Kenny, Paul, Australian Tax 2013 (LexisNexis Butterworths, 2013)
6 Krever, Richard E, Australian Taxation Law Cases 2013 (Thomson Reuters, 2013)

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Dave business by paying him $400,000. Furthermore, the contract between Doors RUs and
Dave ended prematurely and yielded $80,000 in lump sum as the compensation payment to
Dave.
With reference to the “section 102-5 of the ITAA 1997” Dave would be held liable
for taxation for income year ended, since the sale of commercial premises and goodwill
yielded capital gains and the person would be held taxable for the sum of gains made during
the year7. The capital gains made from the sale of premise represents the difference between
cost of purchase and cost of selling.
“Section 104-25 of the ITAA 1997” defines that CGT Event 2 happens when an
individual receives compensation for the cancellation of intangible CGT assets. As it is
understood the Dave received a sum of $80,000 as the lump sum for cancellation of contract8.
With reference to “section 104-25 of the ITAA 1997” the cancellation of contract
constituted an intangible CGT assets. The sum of $80,000 will be considered as the CGT
event C2 since it represented a cancellation of intangible CGT asset.
In the later instances Doors RUs would be paying Dave with the lump sum of $10,000
for not competing in door manufacturing business for three years. The CGT event D1
originate that if an individual creates the contractual right or other legal or equitable rights in
another entity. As held in the case of “Higgs v Oliver (1951)” the lump sum that was paid to
the actor for not undertaking any act, production or direction in another films for a period of
18 months would not be regarded as income9. Similarly, the annual lump sum of $10,000 that
would be paid to Dave for not competing in similar business results in CGT event D1. This is
7 Pinto, Dale. "State taxes." Australian Taxation Law. CCH Australia Limited, 2013. 1763-1762.
8 Basu, Subhajit. Global perspectives on e-commerce taxation law. Routledge, 2016.
9 Miller, Angharad, and Lynne Oats. Principles of international taxation. Bloomsbury Publishing, 2016.

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because the amount of $10,000 represents the creation of contractual right in favour of the
Doors RUs.
According to the Australian taxation office an individual’s main residence is usually
exempted from capital gains tax10. In order to obtain the main residence exemption, the
property should have the dwelling on it and the person should have lived in it. For an
individual to obtain the full exemption from the CGT the dwelling it should be the home for
taxpayer for the entire period that is owned by them11. On the other hand, a person is allowed
to claim partial main residence exemption when the dwelling is owned for the part of the
period in which they owned the property.
As evident in the current situation of Dave the Coburg property was bought by him
and used as his main residence from the time when he moved in. Dave would be allowed to
claim a partial “main residence exemption” since the property was used as his “main
residence” form the period commencing 20 January 2013 to 20 January 201512. However, in
2018 the Coburg property was sold for $650,000 in 2018. The dwelling will be considered
eligible for claiming partial main residence exemption since Dave lived in the property for a
period of 2 years from the time he moved in the property13. The length of time that is spent by
the Dave would be considered substantial and gains made from the sale of property would be
considered for partial exemption from the capital gains tax.
10 Martin, Fiona, and Margaret Connor. "Using Blended Learning to Aid Law and Business Students'
Understanding of Taxation Law Problems." J. Australasian Tax Tchrs. Ass'n 12 (2017): 53.
11 Snape, John, and Jeremy De Souza. Environmental taxation law: policy, contexts and practice. Routledge,
2016.
12 Bankman, Joseph, et al. Federal Income Taxation. Wolters Kluwer Law & Business, 2017.
13 Schenk, Deborah H. Federal Taxation of S Corporations. Law Journal Press, 2017.

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According to the Australian taxation office an individual that owns the property for a
period of minimum 12 months is considered eligible for claiming discount by 50% on the
capital gains made14. Similarly, for small business entity, the property an individual sell as the
business premises might be able to reduce the capital gains by using the small business
concession15. As evident in the current situation of Dave, can claim retirement exemption.
Under the retirement exemption an individual business that makes capital gains from the sale
of premises are considered for exemption up to the lifetime limit of $500,000.
Additionally, an individual under the age of 55, can claim the exemption of the
amount which should be paid in the complying superannuation fund or the retirement
savings. The sale of business premises by Dave would be considered for CGT concession16.
The capital gains made from the sale of the premises would be exempted for Dave up the
lifetime limit of $500,000. Additionally, Dave is also under the age of 55 years, hence the
exemption amount should be paid in to the superannuation fund and retirement savings.
Conclusively, Dave would be able to claim CGT concession for the commercial
premises and would also be able eligible to claim partial main residence exemption since the
property was used by Dave partly till he decided to move to another property in 2015.
14 Oishi, Shigehiro, Kostadin Kushlev, and Ulrich Schimmack. "Progressive taxation, income inequality, and
happiness." American Psychologist 73.2 (2018): 157.
15 Murphy, Kevin E., and Mark Higgins. Concepts in Federal Taxation 2017. Cengage Learning, 2016.
16 Buenker, John D. The Income Tax and the Progressive Era. Routledge, 2018.

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Part 2: Policy Based Question:
Introduction:
Negative gearing is regarded as the untouchable policy of Australian taxation. It
survives due to the persistent of myth that it helps in improving the housing availability and
lowers down the rent. In the recent discussion negative gearing has attracted wide sense of
attraction in media17. As a general rule there are always two sides of story but only one
succeeds. In the recent announcement by the prime minister changes in the negative gearing
off the table has settled some of the nerves but has also windswept some naps. But of late
negative gearing has become expensive, inefficient, inequitable and it lowers the home
ownership. For the governments negative gearing forms, the severe budgetary pressure and it
is on the top list of reformations.
Negative gearing enables the taxpayers in subtracting the losses that is made by them
in investment from their assessable income18. The strategy can be considered as the attractive
element for the taxpayers as they can deduct the full sum of interest payment and would only
paid tax for the half amount of the capital gains. The current study would be assessing the
argument for or against the negative gearing and would also consider the fairness, efficiency
and government protection of revenue.
Argument against the negative gearing:
Like majority of the tax concession on investment, negative gearing is regarded as the
partial to the wealthy people. Majority of the people with negative geared residential property
17 Huizinga, Harry, Johannes Voget, and Wolf Wagner. "Capital gains taxation and the cost of capital: Evidence
from unanticipated cross-border transfers of tax base." Journal of Financial Economics (2018).
18 Dimmock, Stephen G., et al. "Capital gains lock-in and governance choices." Journal of Financial
Economics 127.1 (2018): 113-135.

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falls under the top 40 per cent of the wage earners. While the top two of the revenue earners
claim half of the capital gains19. The most vital argument against the negative gearing is that
it increases the price of house since it upsurges the after tax returns of the housing investors,
and hence prices are greater than they it would have been otherwise. This assist the current
owners of home in accelerating the declining rates of home ownership among the fresher
group age.
The best way of reducing the distortion in the housing market and reduced budgetary
costs of negative gearing would be eliminating the capital gains tax discount. This would
enable the government in increase in revenue by $5 billion in the extra revenue year while
removing the incentive for the house price speculations. However, if the policy makers are
not willing to reform the capital gains tax, reformations of negative gearing would be
regarded as the good alternative20. In short term basis, removal of capital gains helps in
protection of government revenue as government would be able to collect more than $4
billion over the time as the taxpayers may commence the use of accumulated losses to lower
down the tax that would be payable on the capital gains.
For the definition of negative gearing, property that is negatively geared costs greater
than the revenue it earns in the form of rent. There are certain aspects that losses can be offset
against the other types of income. Consequently, this results in purchase of property more
affordable as investors able to access the long term capital gains even though the property is
not the yielding profit in short terms21. Bodies such as Australian council of Social Services
19 Jacob, Martin. "Tax regimes and capital gains realizations." European Accounting Review 27.1 (2018): 1-21.
20 Blouin, Jennifer L., Brian J. Bushee, and Stephanie A. Sikes. "Measuring tax-sensitive institutional investor
ownership." The Accounting Review 92.6 (2017): 49-76.
21 Grudnoff, Matt. "Top gears: How negative gearing and the capital gains tax discount benefit the top 10 per
cent and drive up house prices." (2015).

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states that this are tax relief together with the capital gains tax discount, is increasing
speculative purchase of the real estate in Australia, leading to rise in price for regular buyers
of homes.
Tax break in capital gains and negative gearing does not results in improvement in
housing affordability; they make it poorer by increasing the prosperousness in house prices
like the one that is prevailing in Sydney presently in Sydney22. Less than one tenth of the
negative gearing housing investment are for the properties that are new while the other nine
tenth increase up the price of the current housing.
Mythologies and popularity of taxpayers are not regarded as the good reasons for
maintaining the expensive, inefficient and inequitable arrangement of tax that increases the
ownership of house more out of reach of the younger populations. Negative gearing is
regarded as the tool that should be eliminated sooner than later.
Arguments for Negative Gearing:
According to the several studies conducted by researchers under the present policy
settings changes in the residual gearing would ultimately help in lowering the affordability of
houses and would decrease standard of livings for Australians23. The new housing is regarded
as highly overtaxed segment in the economy but the removing the negative gearing could
result in discourage investment and would ultimately worsen the situation. This would
ultimately lower the supply of housing and would result in rise in cost of rents.
As stated by the Property Council of Australia negative gearing cannot be regarded as
the tool for the use of healthy people but also forms the feature for several Australians in long
22 Daley, John, and Danielle Wood. Hot property: negative gearing and capital gains tax. Grattan Institute,
2016.
23 Davidson, Peter, and Ro Evans. "Fuel on the fire: Negative gearing, capital gains tax & housing
affordability." ACOSS Papers (2015): 29.

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term planning of the financial security. The data is considered as conclusive because in
Australia negative gearing is largely used by the workers of average group who majorly owns
a single investment property. Some scholars have stated that removing the negative gearing
would not only impact the daily investors but would also create a staggering impact on the
private renters. Majority of populations in the rental accommodations and negatively
effecting on the supply of house would result in serious impact.
Tax practitioners have favoured keeping the negative gearing because it helps in
improving the supply of housing by promoting investment. It helps in keeping down the cost
of rent because of the greater availability of the rental property. Arguments bought forward
by tax practitioners states that negative gearing provides the Australian citizens with the
opportunity of building wealth for themselves, for their family and retirement24. The removal
of negative gearing would increase the rents because of the lower supply of housing and
increased competition in the housing property. The negative gearing investors supports the
tenancy of private residential market as it helps those that are unable to afford to purchase
and reduce the demand on the government public housing.
Tax researchers have cited that negatively geared properties are running at the original
loss for the investors. Despite the loss can be used to decrease the tax, the investors are yet in
the poor position in comparison to not retaining the property. The investors are anticipating to
make the profit either when the net rental income increases over the time and goes past the
interest costs or the capital gains when the property is disposed of.
Following the sale, the capital gains income treatment is favoured by the system of
taxation as only half of the capital gains is assessed as the assessable income given the
investment is held for a period of twelve months with only the real value of the capital gains
24 Cho, Yunho, Shuyun May Li, and Lawrence Uren. "Negative Gearing Tax And Welfare: A Quantitative
Study For The Australian Housing Market." (2017).

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is levied that is having identical effect. Based on the that perspective, distortions are
generated by the 50% discount on the income from capital gains for taxation purpose and not
the negative gearing. Therefore, removing the capital gains would increase the price of house,
leading to the loss of investors and owners of home. The impact of negative gearing is that
the investors can remain ahead in the economic terms and can still lower down the liability of
taxation.
Conclusion:
On a conclusive note the prime minister has ruled out any form of changes in the
negative gearing that contributes more to the relief of the housing industry. When the
negative gearing was eliminated the real rents particularly increased in Sydney and Perth as
there was huge amount of rental vacancies. This is not consistent with the argument that the
negative gearing was viewed as the significant factor as negative gearing was regarded to
create the negative effect on the rents in all the capital cities. With the increase in rent in two
cities did match up with the provisional elimination of the negative gearing levy deductions,
it is not likely that the change would create a considerable effect on the rents in any main
capital city in Australia.

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References:
Bankman, Joseph, et al. Federal Income Taxation. Wolters Kluwer Law & Business, 2017.
Basu, Subhajit. Global perspectives on e-commerce taxation law. Routledge, 2016.
Blouin, Jennifer L., Brian J. Bushee, and Stephanie A. Sikes. "Measuring tax-sensitive
institutional investor ownership." The Accounting Review 92.6 (2017): 49-76.
Buenker, John D. The Income Tax and the Progressive Era. Routledge, 2018.
Cho, Yunho, Shuyun May Li, and Lawrence Uren. "Negative Gearing Tax And Welfare: A
Quantitative Study For The Australian Housing Market." (2017).
Coleman, Cynthia and Kerrie Sadiq, Principles Of Taxation Law 2013
Daley, John, and Danielle Wood. Hot property: negative gearing and capital gains tax.
Grattan Institute, 2016.
Davidson, Peter, and Ro Evans. "Fuel on the fire: Negative gearing, capital gains tax &
housing affordability." ACOSS Papers (2015): 29.
Dimmock, Stephen G., et al. "Capital gains lock-in and governance choices." Journal of
Financial Economics 127.1 (2018): 113-135.
Grudnoff, Matt. "Top gears: How negative gearing and the capital gains tax discount benefit
the top 10 per cent and drive up house prices." (2015).
Huizinga, Harry, Johannes Voget, and Wolf Wagner. "Capital gains taxation and the cost of
capital: Evidence from unanticipated cross-border transfers of tax base." Journal of Financial
Economics (2018).
Jacob, Martin. "Tax regimes and capital gains realizations." European Accounting
Review 27.1 (2018): 1-21.

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Kenny, Paul, Australian Tax 2013 (LexisNexis Butterworths, 2013)
Krever, Richard E, Australian Taxation Law Cases 2013 (Thomson Reuters, 2013)
Martin, Fiona, and Margaret Connor. "Using Blended Learning to Aid Law and Business
Students' Understanding of Taxation Law Problems." J. Australasian Tax Tchrs. Ass'n 12
(2017): 53.
Miller, Angharad, and Lynne Oats. Principles of international taxation. Bloomsbury
Publishing, 2016.
Murphy, Kevin E., and Mark Higgins. Concepts in Federal Taxation 2017. Cengage
Learning, 2016.
Oishi, Shigehiro, Kostadin Kushlev, and Ulrich Schimmack. "Progressive taxation, income
inequality, and happiness." American Psychologist 73.2 (2018): 157.
Pinto, Dale. "State taxes." Australian Taxation Law. CCH Australia Limited, 2013. 1763-
1762.
Sadiq, Kerrie et al, Principles Of Taxation Law 2018
Schenk, Deborah H. Federal Taxation of S Corporations. Law Journal Press, 2017.
Snape, John, and Jeremy De Souza. Environmental taxation law: policy, contexts and
practice. Routledge, 2016.
Woellner, R. H et al, Australian Taxation Law 2018
Woellner, Robin, Stephen Barkoczy and Shirley Murphy, Australian Taxation Law 2018
Ebook 28E (OUPANZ, 2018)

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