Budget impacts of negative gearing

Street of residential houses
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Posted 04/08/2015 by Tarek Dale

‘Negative gearing’ has been a topic of frequent debate. This flagpost summarises some of the estimates of the impact of negative gearing on the Commonwealth Budget.

Negative gearing is a strategy of borrowing to invest in an asset which generates income, but not enough to cover the investor’s costs (including interest and depreciation). Although this results in a loss for the investor, the loss can be used to reduce other taxable income, lowering the investor’s tax liability. A deliberate negative gearing strategy relies on an expectation that gains from selling the asset at a higher price will be greater, in after-tax terms, than the earlier losses.

The Treasury’s Tax Expenditure Statement (TES) does not include any estimates in relation to negative gearing, because negative gearing is not considered to be a tax expenditure under the benchmarks used for the TES. The Government’s tax discussion paper notes that ‘negative gearing is … simply the operation of Australia’s tax system allowing deductions for expenses incurred in producing assessable income’ (p. 64).

However, the fact that Australia’s tax system allows the deduction of investment losses against other taxable income impacts the Commonwealth Budget, in particular due to housing investment. The tax discussion paper notes that ‘investment properties constitute a substantial proportion of the total value of negatively geared assets’ (p. 64).

Table 1 below compiles estimates of the budget impact of negative gearing from a range of sources. These vary based on the methodology used, the period covered, and the benchmark against which they are measured. Importantly, some estimates focus purely on residential property (see Ernst and Young below), but others include negative gearing of all asset classes (such as the Parliamentary Budget Office (PBO) costing cited below). For that reason not all estimates are directly comparable, but show the range of estimates of different aspects of negative gearing.

The estimates suggest that negative gearing has an impact that is likely greater than $2 billion annually. The only explicit estimate of additional revenue raised is the Parliamentary Budget Office’s estimate cited below, in relation to a particular policy proposal. 

Table 1: Estimates of the budget impact of negative gearing

Period estimate applies to   Estimate ($b)   Source   Notes 
2017-18 2 Australian Greens, Reforming negative gearing: A fairer housing market for all Australians, 2015, p. 2.  Cites modelling by the Parliamentary Budget Office of changes to ‘Remove negative gearing for all asset classes, for assets purchased on or after 1 July 2015’. This therefore does not include negative gearing of assets purchased before that date, which may be included in other estimates. 
2016-17 0.9 Australian Greens, Reforming negative gearing: A fairer housing market for all Australians, 2015, p. 2.  Cites modelling by the Parliamentary Budget Office of changes to 'Remove negative gearing for all asset classes, for assets purchased on or after 1 July 2015'. This therefore does not include negative gearing of assets purchased before that date, which may be included in other estimates. 
2014-15 3.7 M Grudnoff, Top Gears: How negative gearing and the capital gains discount benefit the top 10 per cent and drive up house prices, The Australia Institute, 2015, pp. 4-5. Cites modelling by the National Centre for Social and Economic Modelling, based on 2011-12 Australian Taxation Office (ATO) data projected forward to 2014-15. 
2011-12  2.4 J Kelly, Renovating Housing Policy, Grattan Institute, 2013, p. 25.  Estimate based on the Australian Bureau of Statistics Survey of Income and Housing (SIH), which the report notes may underestimate the impact. 
2010-11 >5 S Eslake, Australian housing policy: 50 years of failure, submission to the Senate Economics References Committee inquiry on Affordable Housing, 2013, p. 10. Based on ATO statistics; assumes investors are on a 38 per cent marginal tax rate. 
2010-11 2.6-3.6 M Johnson and D Baker, submission to the Senate Economics References Committee inquiry on Affordable Housing, The Australia Institute, 2014, p. 8. Based on 2010-11 ATO tax statistics. 
2007-08 >4.8 S Eslake, ‘Imagine a tax system that penalised work’, Sydney Morning Herald, 2011. Based on 2007-08 ATO statistics; assumes investors are on a 38 per cent marginal tax rate. 
2007-08 2 Senate Committee on Housing Affordability in Australia, A good house is hard to find: Housing affordability in Australia, 2008, p. 61.  Based on 2005-06 ATO statistics, assuming a marginal tax rate of 30 per cent, and projected forward to 2007-08. The committee report notes that this was below several estimates provided by witnesses to the inquiry. 
2006-07 >0 J Freebairn, Tax Breaks for Owner Occupied Housing, 2009, cited in J Yates, Tax expenditures and housing, AHURI, 2009, p. 52.  - 
2005-06 1.2 J Yates, Tax expenditures and housing, AHURI, 2009, p. 52. Based on the 2005-06 SIH data. 
2004 1.6 P Abelson and R Joyeux, ‘Price and efficiency effects of taxes and subsidies for Australian housing’, in M Stewart, ed, Housing and Tax Policy, 2010, p. 98.   -
2002-03 0-1.4 Ernst and Young, Negative Gearing: Report prepared for the Property Council of Australia, 2006, pp. 25-26. Uses $1.37 billion in net loss on rental properties, and notes that ‘just over 50 per cent’ of total rental deductions are comprised of interest. Because this focuses on net rental losses, it only relates to residential property (and not other asset classes). 
Tags: taxation, housing

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