ACOSS says mum and dad investors are a negative gearing myth

The Australian Council of Social Service (ACOSS) continues to urge the government to restrict tax deductions for negatively geared property investments.

They claim the landlord tax breaks are “feeding a fire which the Reserve Bank and APRA are trying to put out”.

The ACOSS report, Fuel on the fire: Negative gearing, Capital Gains Tax and housing affordability, says its is a myth that negative gearing makes rental housing more affordable and that the benefits mainly go to ‘mum and dad' investors on middle incomes.

“Negative gearing and the tax break for capital gains don't improve housing affordability; they make it worse by fuelling home price booms like the one in Sydney right now. Less than one tenth of negatively geared housing investments are for new properties, the other nine tenths bid up the price of existing housing,” ACOSS CEO Dr Cassandra Goldie said.

“These tax breaks also make it more difficult for the Reserve Bank to manage the economy. Over-heating in housing markets is making it harder for the Reserve Bank to cut interest rates when this is needed. The tax breaks are feeding a fire which the Reserve Bank and APRA are trying to put out.”

According to the report, tax breaks such as negative gearing and the capital gains tax discount have inflated housing costs in every housing boom since the 1980s. Since the cut to capital gains tax in 1999, lending for investment housing has risen by 230% compared with 165% for owner occupied housing.

“It's not your average mum and dad investors on middle incomes who are benefitting from the generous tax concessions that have allowed two thirds of individual rental property investors, or 1.2 million people, to report tax-deductable ‘losses' of $14 billion in 2011,” Goldie said. 

“The reality is that over half of geared housing investors are in the top 10% of personal taxpayers and 30% earn more than $500,000.”

ACOSS's negative gearing myths and facts

Myth 1:
The Hawke government's restrictions on negative gearing from 1985-87 resulted in rent increases and had to be reversed.

Fact:
The main reasons for rent increases at that time were higher interest rates and a share-market boom which diverted investment from rental property. Even so, this only happened in Sydney and Perth. Lending to rental property investors still rose by 42% across Australia.

Myth 2:
Negative gearing can't be responsible for overheating in housing markets in recent years because it's been in place for over 20 years.

Fact:
Negative gearing adds fuel to each housing boom by encouraging property speculation. Its impact has grown because investors have easier access to credit. The halving of tax rates on capital gains in 2000 (in place of the indexation of capital gains for tax purposes which was less encouraging of speculative investment) also made negative gearing more attractive.

Myth 3:
The benefits of negative gearing mainly go to ‘mum and dad' investors on middle incomes

Fact:
This is an illusion due to the way the Taxation Statistics break down deductions for rental property investment by taxable income, which is itself reduced by negative gearing strategies. Many households that appear to be ‘middle income' actually have higher incomes before deductions are subtracted. In reality, half the value of deductions for negatively geared investments go to the top 10% of taxpayers.

Source: ACOSS