Property 101: The negative gearing numbers

Property 101: The negative gearing numbers
Property 101: The negative gearing numbers

CoreLogic RP Data undertook a thorough analysis when the Australian Tax Office (ATO) released the taxations statistics for the 2010/11 financial year. 

The statistics showed that over the year there were 1,811,174 individuals that owned a rental property. This was out of 9,416,002 individuals that have a taxable income and 12,637,623 individuals that lodged a tax return.

The data indicates that 14.3 percent of individuals that lodged a tax return owned investment properties while a greater 19.2 percent of individuals that reported a taxable income owned investment properties. This indicates that despite the fact 1,811,174 individuals own investment properties, the vast majority of Australians don’t invest in residential property.

Of the 1,811,174 individuals that reported to the ATO as having an investment property, 1,213,595 of these individuals, or two out of every three investors, were recording a loss on their rental income. The total value of these losses over the year was $13.285 billion. Obviously negative gearing of investment properties allows owners to claim a tax deduction on these costs. The average annual loss for these property investors with negatively geared properties was $10,947 or $210.50/week.

Click to enlarge

Property 101: The negative gearing numbers

There were 597,577 individuals that made a profit from their investment property in 2010/11. The total value of this income was $5.423 billion. These investors have no losses to claim a tax deduction on and would have to pay tax on their investment property; of course they would have more money in their hand each week as a result of the positive gearing. The average annual profit earned from these positively geared investment properties was $9,075 or $174.50/week.

Click to enlarge

Property 101: The negative gearing numbers

The data shows that on average, the losses made on investment properties that are negatively geared are larger than the profit on the positively geared propertied.  What negatively geared investors sometimes lose sight of is the fact that a loss is a loss. 

What I mean is that although the loss is tax deductible at the end of the financial year they have to carry the cost of that loss throughout the year at a sometimes significant cost.  For some it would undoubtedly be preferential to have that extra money on hand throughout the year rather than getting a larger tax return at the end of the financial year.

Click to enlarge

Property 101: The negative gearing numbers

The $13.285 billion in rental losses over the 2010/11 financial year was 24.7 percent higher than the 2009/10 financial year however, it remains -0.2 percent lower than the historic high value of losses recorded over the 2007/08 financial year. 

The number of negatively geared property investors rose by 4.8 percent over the year however, the number of investors was also below the historic high of 2007/08 by -1.8 percent.

Click to enlarge

Property 101: The negative gearing numbers

According to the ATO data, 72.8 percent of individuals that owned an investment property owned just one.  Meanwhile, 18.9 percent of individuals owned 2 properties while just 0.9 percent of individuals owned 6 or more.

No doubt the total value of the losses and the proportion of total investors claiming a loss on their property are quite alarming.  From an investment perspective you’d assume that it is generally preferential to make a profit than it is to carry a loss for 12 months of the year.  Where negative gearing works is when it reduces an individual’s taxable income to such an extent that there is a greater financial windfall from claiming that loss than there would be if that property made a profit. 

Of course investors using a negative gearing strategy also expect the value of their asset to rise, offsetting the shortfall. These benefits are usually more likely to accrue to those earning higher incomes and this is where you have to wonder if many investors really are benefiting from the negative gearing of their investment properties.

Click to enlarge

Property 101: The negative gearing numbers

The ATO data indicates that 72.3 percent of individuals with a loss making investment property have a taxable income of less than $80,000 a year, with 32.3 percent having a taxable income of less than $37,000 per year.

The total value of the losses for individuals earning less than $80,000 equated to $9,756.25 a year or $187.62 per week.  Assuming that they all had a taxable income of $40,000 per year, which represents the middle of the range, the $9,756.25 annually is 24.4 percent of their annual taxable income.

That is a significant proportion of their taxable income and a significant cost to the individual throughout the year just to secure a tax deduction at the end of the year.  If we assume the average income earner that has a taxable income of $51,342 owns an investment property, that investment property is costing them 21.3 percent of their taxable income throughout the year.

There have been many calls for negative gearing to be removed from residential property however, I believe it is extremely unlikely that either side of politics is likely to go down that path. 

Negative gearing of residential property saw the ATO forego $13.285 billion in taxation revenue over the 2010/11 financial year.  What it did allow for, because it is so ingrained in the psyche of those who invest in property, is for private residents to cater to demand for rental properties from those residents that don’t own their own home.  It is clear that the provision of rental accommodation is not a burden that Governments wish to bear however, one has to wonder if foregoing more than $13 billion in tax revenue is a cost that the federal Government can afford to give up.

The data also shows that many lower income earners are investing in negatively geared properties, perhaps many are doing so without understanding what, if any, the true benefits are.  The goal of investment should ultimately be to make a profit not a loss and with capital gains in housing much slower over the past five years and this trend anticipated to continue perhaps some investors should re-assess whether their current negative gearing strategy is truly working for them.

Tags: 
Negative gearing Taxation

Comments

Be the first one to comment on this article
What would you like to say about this project?