What The Fuck Is Negative Gearing? The Basics In Under 5 Minutes

Negative gearing is dominating the news cycle at the moment, and it’s become one of the more prominent battlegrounds for the next election. You might have watched Malcolm Turnbull aggressively sweat his way through an interview with Leigh Sales on 7.30 last night on the increasingly heated subject. It’s a touchy subject with a lot of feels – both justified and unjustified – on both sides, which is why Turnbull was doing his best not to tread on toes.

But what is it, actually? It’s one of Australia’s most cherished tax concessions, thought of by people who already own houses as a vital part of the economy, and thought of by young Australians as a weapon used by baby boomers to keep millennials in mouldy inner city houses for five hundred bucks a week with no prospect of ownership.
If you missed the memo on what negative gearing is and what it’s intended to do, here’s the lowdown so you can confront your parents with hot truth while visiting their beautiful home that they own and you do not (potentially thanks to negative gearing).
What the hell is it?
Let’s say you’ve bought yourself a shiny new house. You’ve signed off the mortgage, and now you want to rent that sucker out. Nice job. What a wonderful life you’ve built for yourself. But wait a minute – the rent you’re charging comes to $25,000 a year, but the cost of maintaining the property (including that mortgage) costs you $30,000 a year. Holy smokes, Batman! You’re broke!
Here’s where negative gearing steps in. You can claim that $5,000 as a ‘taxable loss’, which means that you can deduct it from the tax you owe on your other income – like the income you receive from your job.
A loss is always a loss, obviously. It just means that you can take bigger risks and just bloody go for it when you’re thinking about buying an investment property, and let the taxpayer deal with the initial discrepancies between what you earn and what you owe. The idea is that eventually your investment will make enough money that you won’t need to gear it.
Why is this a thing?

The theory is that negative gearing should encourage the construction of new housing because investors without oodles of money are able to enter the housing investment market. Ergo, more housing stock. Aussie governments have considered it a valuable strategy for some time – hell, it first reared its head in 1936 as part of the Income Tax Assessment Act, though it became applicable to actual income much later.
I can tell you what it shouldn’t be used for: an investment strategy. Every time I see some yarn in the property rags about how buying property as a young person is completely feasible because of this cool 23-year-old who built a massive portfolio with a large initial investment from their parents plus a series of strategic tax breaks and leveraged properties I want to scream into a pillow for one thousand years.
Besides, as the Australian Bureau of Statistics reckons that 93 per cent of new investment loans go to people purchasing existing housing – not new stock. So the claim that it encourages new housing doesn’t quite translate to actual new houses.
Why do people hate it? People seem to hate it.

In case you haven’t noticed, the Australian property market is a hellish nightmare world where your mate’s dad Graham owns six coastal villas and you’re stuck renting a two bedroom apartment with your dickhead mate who never does the dishes until the day you both die an undignified death after inhaling too much mould.
Richard Cooke wrote a cracker of an essay for The Monthly where he suggested that negative gearing is merely one of an array of laws, tax breaks and systems which punish young Australians at the expense of older, propertied Australians. That’s the vibe among haters of the policy.
The idea is that we should focus on making housing affordable for new buyers who need somewhere to live rather than giving people who already own houses a helping hand in buying another one for investment purposes. Basically, with rent and housing prices so stratospherically expensive, people are looking for some kind of relief.
And why wouldn’t they? Renting sucks. Expensive renting sucks more. The prospect of doing it for life is humiliating and precarious – something that a lot of politicians on both sides of the debate probably don’t get, if we’re being honest.
Who benefits from negative gearing? Is it… bloody rich dickheads?!

This was more or less the central contention of the Grattan Institute, a thinktank who released their report on negative gearing on Monday. They claim that almost half of all negative gearing tax deductions are claimed by the top 10 percent of earners, and that the professions most likely to negatively gear are surgeons, anaesthetists, finance managers and lawyers. A very poor demographic all round.
The professions least likely to negatively gear? Teachers, nurses, hairdressers and sales assistants. Fat cats the bloody lot of them.
Malcolm Turnbull hopped online and wrote a blog in response to the Grattan Institute’s claims. He says that the opposite is true – while rich people will always have access to other tax deduction schemes on all their investments, low and middle income earners can and do utilise negative gearing.
He also argued (quite sweatily) on 7.30 that obviously top earners will take the lion’s share of deductions, because they have the most income and tax to be claiming against. You could argue that’s unjust, but hey, that’s not the argument Turnbull is making.
Who wants to drop it and who wants to keep it?
Basically, Labor has proposed a fairly modest scheme to reform negative gearing. It’ll be limited to new houses only from 2017, which means that theoretically it’ll still exist, but might encourage new houses to be built to take advantage of it. They’ll also slice the capital gains discount in half, which is what they reckon – in conjunction with negative gearing – encourages the rich to go absolutely hogwild on housing at the expense of first-time homebuyers.
The Greens want negative gearing gone on all new investments – with old investments allowed to continue – and for the gained tax revenue from that reform to be invested in new housing for the homeless.
The Coalition think it’s fairly sweet as is. They’ve made noise about possible reform in the past, but honestly, with the Liberal base chockablock full of people who bloody love a bit of negative gearing and aren’t totally chuffed with the idea of not having it anymore, it seems very unlikely they’ll ever want to change.

Sweet. I didn’t read any of this article but I’m keen to know: if we reform negative gearing, can I buy a house?
Look, no one really knows. The Grattan Institute’s report concedes that Australia’s housing affordability nightmare comes from so many factors, many of which are indescribably complex, that it’s very possible that winding back negative gearing will have a marginal impact.
In fact, the figure they provide in their report is a fairly modest 1 to 2 percent reduction in housing prices, at least in the mid-term. They’d probably fall more in areas with bigger investor interest, like inner-city apartments. But they do point out that this isn’t a quick fix – it’d be an investment in sound policy. Here’s how they lay it down:
It is difficult for governments to address housing affordability for new buyers while continuing to offer generous tax breaks to investors that bid up house prices.
They recommend a much more general focus on incentivising new housing development than just plain ole negative gearing.
So that’s the lowdown. Negative gearing… how bout it? Hopefully you’ve now got a more solid grasp on what it is, who loves it, who hates it and who wants to do something about it.

More Stuff From PEDESTRIAN.TV