Taxation and Negative Gearing: Assessment of Taxation and Negative Gearing

Taxation law
Taxation and Negative Gearing
Assessment of Taxation and Negative Gearing
Name of the Author-
University Name-

With the changes in time, each and every organization needs to pay tax on their earning as
per the applicable laws and regulations. Taxation, as known to everyone is a compulsory
payment that is made to the government on any kind of income made or gain realised by a
person. There is no immediate return that a person realises from the payment of tax. The only
benefit is in the form of investment in public services that is made by the government for the
benefit of the whole country. Due to no immediate and direct benefit, people since ages are
looking for ways to reduce the tax implications by hook or crook. Some methods to reduce
the tax liability are however legal and maintained in tax laws. One such method offered by
the Australian tax laws is of Negative Gearing. It is the process to lower down the tax
payment and reduce the cash outflow in effective way.
Negative Gearing as the name suggests does the gearing of what is negative. This concept
works on the negative that is created by the investments. The motive of making any
investment is to earn profits, but when the costs of carrying those investments overweigh the
income generated by them, they become loss generating assets. Negative gearing works by
helping the tax payer to set off his taxable income being rental and other income including
salary and wages with the investment expenses by claiming them as deductions. The
expenses incurred as interest on loan taken to acquire the investments can be claimed and the
capital expenses can be deducted over years in form of depreciation1. It is used as strategy by
the people to lower down the overall tax payment2
For Australia, negative strategy is a very popular approach followed by the investors.
Negative gearing has allowed them to reap the benefits of the short term losses that the
investors face in the investments made by them. This benefit is mostly attained by the top
layer of income earners in Australia. Apart from this there are several arguments that are
being put in the favour and in against of the removal of the negative gearing system3
1
2 John., Freebairn., Taxation of housing. Australian Economic Review, (2016) 49(3), pp.307-
316.
3 , Peter. Davidsonand., Ro., Evans, Fuel on the fire: Negative gearing, capital gains tax &
housing affordability (2015), ACOSS Papers, p.29.

Negative gearing is proposed to be removed by a number of people. Many statements and
arguments have been promoted by people in the favour of removal of negative gearing. The
main statement that people raise for the support of the removal of negative gearing forms the
ground of fairness. It is debated that the benefit of negative gearing is availed by the top 10%
tax payers of the country who represent the rich section, this way they are able to reduce their
tax implications and save more. In the end this makes the rich more rich and poor more poor.
The gap between the both is widened4
Further, because of negative gearing, the mind set of people while investing is to select those
propositions on account of which they are able to save their tax liability and not those
investment options which make them generate high profits. The point of view of the people
on account of negative gearing is to make investments that can reduce tax implications. The
traditional base of getting a higher return with the help of investments is being ignored
completely. Due to negative gearing, people have started investing more in the house
properties, and as an ultimate result the overall costs for the tenants rises as they are not
having any bargaining power5
The investments price for the house property rises with the wealthy people investing a lot in
the same. This is because there is a rise of demand of investment property. Due to this, the
availability of house property for the first home buyers suffers because the prices of the
properties get inflated because of this rising demand. A false bubble is created in the market
that paves a way for the entry of the speculators in the property market. As far as the
implications on the government revenue are concerned, the treasury of government face a
downward trend due to the application of negative gearing. The revenues collected by the
government are decreasing gradually every year as many investors are entering investment
market just to reduce the overall tax liability. This calls a blot on the development
programmes that government want to initiate as there is no fund availability with the
government to commence any of them. Moreover, the public service facilities also face less
development.
4 More., Grudnoff,. Who’s getting negative? The benefits of negative gearing by federal
electorate., (2015).,34(3), pp.37-47.
5, Keith., Jacobs., A discussion on negative gearing and its implications for housing
(2016).,44(3), pp.47-87.