Why the Albanese Government will NOT get rid of negative gearing

Scott Kuru February 13, 2024 5 min read

KEY POINTS

Negative gearing is back on the political agenda, with the Greens and cross-bench looking to curb the popular property investment tax break
Treasurer Jim Chalmers has ruled out changes, but the Opposition argues Labor has a secret plan to target negative gearing and tax the family home
Opponents argue negative gearing doesn't do much to increase the supply of rental properties, helps push up home prices and is inequitable
Supporters argue it’s an important incentive to get Australians to invest in property
Economic analysis shows removing the tax perk would only decrease home prices marginally while increasing rents

He may have lost two Federal elections, but former Labor leader Bill Shorten hasn’t lost his sense of humour.

“I have learnt my lesson.”

“I take tax reform to the (2019) election and all we got at the end of it was Scott Morrison!” the Labor frontbencher told Nine’s Today show last week, to roars of laughter from hosts Karl Stefanovic and Sarah Abo.

The “tax reform” Bill Shorten was joking about was his plan to change negative gearing.

The major tax break for property investors is in the news again, with the Greens pushing to limit negative gearing to a single investment property and key Senate crossbenchers – Jacqui Lambie, David Pocock and Lidia Thorpe – wanting changes to the scheme.

The Greens are trying to use negative gearing as a bargaining chip in return for agreeing to support the government’s much-vaunted “help to buy” housing plan in parliament.

What is negative gearing?

Negative gearing is a uniquely Australian tax strategy that allows property investors to deduct the losses from a rental property, including interest payments on any loan to fund the purchase, to reduce their income tax bill.

The latest available figures from the Federal Treasury say that in 2020-21, about 1.1 million property investors reported losses of $7.8bn and claimed a tax benefit of $2.7bn.

That’s expected to be considerably higher when we see this and last financial year’s numbers, because of much higher mortgage interest costs.

Investors are also allowed to halve the capital gains tax payable on a property when it is sold if it is owned for at least 12 months.

The pros and cons of negative gearing…

Opponents say these large property tax breaks help distort the property market, pitting investors against first-home buyers and driving up home prices.

Many claim that it’s also inequitable, as the tax breaks favour more affluent Australians.

The Economics Editor at The Conversation, Peter Martin, argues negative gearing rewards “dud landlords” whose properties don’t make money.

He also claims that negative gearing doesn’t do much to increase housing supply, as the “overwhelming bulk of investor home loans go to "investors" planning to buy existing homes.”

On the other hand, supporters say negative gearing makes property - with its relatively high entry costs compared to equities and other investments - more attractive.

“The Henry Tax Review, Productivity Commission and Reserve Bank of Australia have all said

curtailing investor incentives like negative gearing and capital gains tax discounts reduces

housing supply rather than improves it,” says Denita Wawn, the CEO of Master Builders Australia.

In a country with a housing shortage, where one-third of households are renters and governments have consistently failed to deliver enough public and social housing, that cannot be ignored.

There’s also overwhelming evidence that most landlords aren’t “property hoarders”, with tax office figures showing the overwhelming majority of investors (71%) own just one property.

Property_interest_Feb14_24

Property investment plays an important role in retirement planning, with 41% of the total assets invested in self-managed superannuation funds (SMSFs) held in residential property.

There’s also plenty of economic analysis that questions whether housing affordability would improve with changes to negative gearing and the capital gains tax concession.

“It is a non-issue from the point of housing affordability,” former RBA economist Peter Tulip told Nine newspapers.

Dr Tulip - who now works at the Centre for Independent Studies - said research by economists at Melbourne University found that removing negative gearing would reduce house prices by just 0.9% while raising rents by 2.5%.

Realpolitik

When asked about whether the government was considering changes to negative gearing, Treasurer Jim Chalmers certainly sounded emphatic:

“That’s not something that we’re proposing, not something that we are considering, not something that we are working up,” he told Sky News.

The Federal Opposition claims the government can’t be trusted to leave negative gearing alone, pointing to how Prime Minister Anthony Albanese changed his stance on the controversial Stage 3 tax cuts, by redistributing more of the cuts towards lower and middle-income earners.

Expect to see opposition leader Peter Dutton campaign hard on negative gearing in the lead-up to the next election, with echoes of Labour’s highly effective but misleading 2016 “Mediscare” campaign.

As The Australian’s Political Editor Simon Benson says, “Dutton will now seek to establish a pattern of deception from the Prime Minister over Labor’s future tax intentions on negative gearing and the family home.”

But equating a political backflip on tax cuts - a backflip that the polls show is popular with the majority of voters - with negative gearing, is a long bow to draw.

With 2.2 million investment property owners in Australia, Anthony Albanese knows only too well what happens to political leaders who try to tinker with the long-standing tax break.

Under Bill Shorten’s leadership, Labor proposed limiting negative gearing to newly built properties, as well as cutting the capital gains tax discount from 50 per cent to 25 per cent.

Mr Shorten took the policy to two elections and lost both, including the supposedly ‘unlosable election’ in 2019, which was won by Scott Morrison.

Mr Albanese quickly dropped the policy when he took over as Labor leader later in 2019.

And then there’s self-interest…

A recent check of Federal MPs’ interests by the Nine newspapers revealed that more than 65% of all federal parliamentarians own two or more properties.

“It’s hard to believe this doesn’t skew the perspective (of MPs) when considering the suitability of generous tax concessions,” says independent Senator David Pocock.

The Prime Minister owns two homes in Sydney, both rented out, and until recently, Peter Dutton held a substantial property portfolio.

Even the Greens - who want to wind back negative gearing and have often castigated “property hoarders” - have five members who own two or more properties.

When it comes to politicians and property investment tax breaks, it’s worth remembering the old adage: “In the race of life, always back self-interest.”