Negative Gearing - A worthy practise, assuming it’s right for you
by John Hopkins, Executive Chairman
“The job of an economist is to make a weather forecaster look good”
Neville Norman, Melbourne University’s Professor of Economics, made the above statement over twenty years ago whilst introducing himself and his profession at a conference at the The Hilton with Bob Ansett and myself.
It amazes me, after carefully watching and observing for many years, just how accurate Neville Norman’s statement has proven to be.
Since this statement was made, how often have we heard those adamant predictions by economists around the world, with what would seem unquestionable credentials. Or those economic forecasting organisations, accepted to be ‘the ones,’ whose predictions, if reviewed in hindsight, would have proved to be completely incorrect.
At the Tax Forum held recently in Canberra, Saul Eslake, Program Director at the Gratton Institute, made some considerably negative statements and predictions about negative gearing. Saul culminated his statement by claiming negative gearing is incorrectly costing our country four and a half billion dollars every year.
There have been many journalists, John Faine of the ABC amongst them, who have been particularly vocal regarding negative gearing, implying the process is a rort, or for tax cheats or for millionaires who rip off the nation.
Firstly, negative gearing is not a rort, and the Australian Taxation Act (ATA) pointedly confirms this. The ATA specifically allows for an individual tax payer to claim an expense against other income in the same year, if they have intentions to create a positive income from the asset sometime in the future; this is a completely legitimate and accepted process.
Negative gearing is used by individuals and corporations all over the nation. Whilst certain upfront costs would be considered capital expenditure, BHP, for example, is able to claim certain exploration and other expenses for a mine which doesn’t produce a positive income for five years, in the year they pay those expenses. Or a small start up business that spends years establishing an activity before it produces a positive income. And it’s the same for a property investor, who is in their right to utilise negative gearing to claim their losses each year until that asset creates a positive income.
It is important to acknowledge that before capital gains tax was introduced, it was possible to purchase an investment property, negatively gear that property for two years and then sell the property, making a substantial capital gain in the process, whilst not paying any tax on that gain; all the while claiming the expense of negative gearing.
My point is that negative gearing is a reasonable tax deduction if the investor intends on retaining the asset until such time as it begins to create a positive income.
As for the assertion by some individuals that all negatively geared property investors are ‘ugly wealthy Australians’, well this is simply unfounded and incorrect.
Saul Eslake, at his address in Canberra, also insinuated that after Paul Keating quarantined negative gearing in August 1985, the impact on the rental market was practically nonexistent. Comments of this nature, in my respectful but experienced view, are reckless. My question to Saul is “where were you when this happened?” Surely Saul couldn’t have been in Sydney or Melbourne, as the impact was visibly significant and vast. That’s why Mr Keating reversed the circumstances within about two years of implementing it.
There have been statements by self professed individuals suggesting today’s rental market would not be impacted if the government changed negative gearing regulations; in my considered opinion, based on forty years of business and experience in financial services and property, this notion is completely groundless. With today’s population increases, particularly in Melbourne and Sydney, but also in Brisbane and all over Australia, prohibiting negative gearing would create a huge shortage of rental properties.
It would also have a huge detrimental effect on the construction industry, as it’s primarily property investors who purchase residential property in property developments being constructed.
Often ignored by those naïve individuals is the very significant fact that property investment is a real and effective method for bolstering the savings of middle Australia. The Housing Industry Association (HIA) makes point of both capital gains tax and negative gearing covering the majority of asset classes, including property, and notes it is unfortunate that investment in housing is often singled out as a criticism of negative gearing. HIA also makes point of the many other countries that allow negative gearing, including Canada, Japan, New Zealand and Sweden.
It’s imperative you understand the points I make, and are assured of the importance negative gearing has over various investment classes.
For more information on negative gearing, or whether it is suitable for you, please contact our office on 1300 726 082
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