Property investment: who really uses negative gearing?

Investors with negatively-geared property generally have higher-than-average incomes, yet the tax benefit they claim is relatively modest, according to recently published research into the Australian taxpayer.

The findings come ahead of the 2019 Australian federal election, where the negative gearing policies of the two major parties are shaping to be a key policy battleground.

In a study, A Snapshot of the Australian Taxpayer, published in the December 2018 Australian Accounting Review (AAR), University of Technology Sydney accountancy academics David Bond and Anna Wright draw on Australian Taxation Office (ATO) data from the 2013-14 tax year to paint a clearer picture of who actually uses negative gearing for property investments.

The study found that in contrast to some of the rhetoric about those who negatively gear investment property being “average investors”, they had significantly higher-than-average income.

The mean taxable income for investors with negatively-geared real estate was A$81,904, compared with a mean taxable income of those without investment property of A$53,357.

Investors with positively-geared property had a mean taxable income of A$75,908.

Property investment losses and profits

The researchers also looked at the income losses and profits made by property investors.

Investors with negatively-geared property made an average rental loss of A$8604 compared with a mean net rent of A$9281 for positively-geared investors.

Wright says she was surprised by the relatively modest average loss made by negatively-geared investors – equating to about A$165 a week – and questions claims that negative gearing is being used by very high-income earners to avoid paying any income tax at all.

“That’s not going to take somebody who’s earning half a million dollars down to no tax, although I’m not saying that there wouldn’t be one or two in the sample,” she says.

The researchers suggest the gap in net rental income between negatively-geared and positively-geared investors is driven by two factors.

Negatively-geared investors claimed much higher deductions for interest on investment loans, with an average claim of A$13,986 – nearly three times the amount claimed for positively-geared investors.

Secondly, the mean gross rent for positively-geared investors of A$23,448 is significantly higher than for negatively-geared investors, A$16,155.

No benefit for negative gearing

Interestingly, 25 per cent of negatively-geared taxpayers received no net benefit from negative gearing for the period, because their taxable income was so low they did not pay any tax on their income. CPA Australia head of external affairs Paul Drum points out that even though these taxpayers did not receive a tax benefit in that tax year, they may benefit from tax losses carried forward to future income years, and they may also obtain a future capital gains tax benefit.

The two major political parties have contrasting views about who benefits from negative gearing.

In a speech in April 2017, then treasurer [now Prime Minister] Scott Morrison said, “our private rental stock is owned by mums and dads”.

Morrison said, “Just over 1.3 million of these taxpayers negatively gear their investments, including 58,000 teachers and one in five police officers. Two-thirds of those taxpayers who negatively gear their investments have a taxable income of A$80,000 or less.”

Critics say the “taxable income” definition is misleading, because deductions have already been taken out.

The Australian Labor Party says negative gearing is used predominantly by the wealthy – sometimes to the point where they pay no tax – and is making housing less affordable.

Labor says, if elected, it will restrict future negative gearing to new homes. All properties that are negatively geared before the policy starts will be quarantined and not affected.

Wright says she and Bond did the research because she gets frustrated with politicians who make assertations about negative gearing without referring to the numbers. “I always get suspicious when they don’t support it with data, then it doesn’t hold up their argument,” she says.

The study draws on what is known as the ATO’s “2 per cent file” – a file containing the tax information of 2 per cent of randomly-selected taxpayers, stripped of their identities. The data – from the 2013-14 tax year – includes all of the information the taxpayers have put in their income tax returns and so allows researchers to conduct a more detailed analysis than is possible with aggregated data.

Investors’ property losses

The researchers divided taxpayers into three categories: those who negatively gear, those who positively gear (that is, whose rental properties return a profit rather than a loss) and those who do not have investment property.

A little less than 10 per cent of taxpayers in the sample had negatively-geared investment property, a little more than 6 per cent had positively-geared property, while the vast majority – about 84 per cent – had no investment property.

Income tax raised from individual taxpayers represents 47 per cent of the total federal tax revenue, making it the largest single component of tax revenue.

“Given the magnitude of revenue that individual income tax raises, it is of great importance and interest to the Australian people and government,” the authors write in the AAR paper.

The researchers calculate that negative gearing is responsible for a reduction of about A$10.8 billion in taxable income nationally, but this is not the cost to revenue.

Bond and Wright drew on the individual data in the 2 per cent file to calculate how much extra tax each negative gearer in the sample would be paying if they didn’t use negative gearing. Extrapolated nationally, the cost of the negative gearing of investment property to federal tax revenue came in at A$3.46 billion.

* Australian Accounting Review, December 2018, Issue 04, volume 28, no. 87. Published by Wiley for CPA Australia.