NEGATIVE gearing is shaping up as one of the big election issues.
The opponents of negative gearing work from two major premises.
The first is that negative gearing gives an unwarranted tax advantage to those who choose to use it, the second is that negative gearing increases the demand for property and therefore drives up prices, making it harder for young people to get their feet on the property ladder.
Labor’s solution is to restrict the ability for investors to offset property losses against their current income unless they buy a new property.
Let’s take a long-term view.
The average residential property investor understands that any welfare that may be available to them when they retire in 20 years or more is likely to be sparse indeed.
They are also extremely wary of shares, which they regard as “a bit of a punt”, and don’t trust superannuation because of the continual changes we have been subjected to over the past 20 years.
So let’s think about a hypothetical couple, Jack and Jill, both aged 40, each earning $75,000 a year.
They buy a $500,000 investment property today with a mortgage of $450,000.
The net income from the property — after rates, insurance, etc. — will be around $22,000 a year, and they have to pay interest of around $27,000 a year.
In the first year they incur a loss of $5000, giving each one a tax deduction of $2500.
For people in their tax bracket, the tax savings should be around $900 each in the first year. In summary, their negative gearing strategy is costing the taxpayer less than $2000 in year one.
Fast forward five years — by now the house should be positively geared, with Jack and Jill enjoying a small profit, on which they will pay tax.
Now think 25 years ahead, when they are about to celebrate their 65th birthdays.
By now the investment property should be paid off, having been positively geared for years, and if capital gain averaged 3 per cent per annum, the property should now be worth just over $1 million.
What we can say with certainty is that ownership of an unencumbered investment property will wipe out any chances they may have of receiving even a part aged pension.
Also, that if they decide to sell the property to use the money elsewhere, they will be liable for over $100,000 in capital gains tax.
The cost to the taxpayer to provide a pension to a couple aged 65 who live to the average ages, and who have no significant assets apart from the family home, would be at least $800,000.
Let’s put this all together: investors negative gearing a property now are costing the taxpayer a few thousand dollars over the next few years.
The long-term benefit to the taxpayer is that these people are giving up any chance of welfare, and will eventually contribute a huge sum to the public purse by way of capital gains taxes.
A few thousand dollars in tax deductions today are saving the government hundreds of thousands of dollars in welfare down the track.
Who in their right mind would try to stop that strategy?
Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance.