This article was first published in The West Australian, Your Money, on 7 October 2024
Once again, negative gearing is back in the Federal Government’s spotlight.
And it’s happening while the Australian property market is experiencing boom conditions, and a housing crisis ensures that the opinions of various interest groups get plenty of attention.
Negative gearing is always a heated topic, with strong opinions on both sides.
A major criticism is that it allows wealthy property investors to offset their expenses — like interest, depreciation and other costs — against rental income.
In many cases, rent doesn’t cover these costs, leading to tax breaks that benefit millions of landlords.
Critics argue that this disproportionately helps higher-income earners, leaving lower-paid Australians behind.
There’s no denying the short-term impact on the Federal Budget. But what often gets overlooked are the broader economic benefits and long-term revenue gains, such as capital gains tax from property sales and reduced reliance on government pensions for retirees.
In our experience, it’s not the ultra-wealthy who benefit most from negative gearing — it’s typically middle-Australia suburban family types. Take, for instance, a couple earning between $135,000 and $190,000 a year, which puts them in the 39 per cent marginal tax bracket (including levies).
They purchase a $750,000 investment property. Assume they rent the property for $650 a week, generating a 4.5 per cent gross yield.
However, once you factor in property management fees, depreciation, rates, land tax, and insurance, the expenses numbers start to add up.
Using a 6 per cent annual interest rate and holding the property for 15 years with a 4 per cent average growth rate, alongside rent increases at the same pace, the calculations show their net tax refunds over this period would amount to around $65,243.
Meanwhile, with that modest level of capital growth, the property’s value would reach $1,350,708 in 15 years.
After accounting for stamp duty, the capital gain would be about $570,708.
Based on the current system, which taxes half of the capital gain if the asset is held for more than 12 months, the assessable capital gain would be $285,354.
Assuming the capital gain pushes them into the top marginal tax bracket, we can assume the investor could expect to pay around 47 per cent in tax based on current rates, totalling about $134,116.
In the end, the government not only recoups all the tax refunds handed out to the investor over the years through capital gains tax, but it also stands to gain an additional surplus of $68,873.
And that’s not even counting the roughly $60,000 paid to the State government in stamp duty and land tax over the years, or the GST collected on property management fees.
This simplified example doesn’t account for all the variables property investors should consider, but it does highlight how, over the long term, negative gearing can result in a positive revenue outcome for the government.
One has to wonder what kind of modelling the Government is requesting of Treasury to help make decisions on this policy — perhaps they should take a look at these figures we’ve run here.</p
The real issue arises when properties are held for only short periods, as the capital gains may not be enough to cover the negative gearing tax breaks, leaving both the Australian Taxation Office and the investor worse off.
A better conversation might focus on encouraging longer-term property ownership, increasing the likelihood that future capital gains tax revenue will offset negative gearing benefits. Perhaps capital gains discounts could apply only after a longer holding period?
If long-term investors can eventually provide net tax benefits to the government, and also reduce their reliance on public benefits like Centrelink, it makes a much stronger case for offering tax concessions during the early years of ownership.
Raymond Pecotic is Managing Director of Empire Financial Group
