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Negative gearing: Reform can save Government $1.7 billion without hurting investors

Source: PerthNow

REFORMING negative gearing could save the federal government A$1.7 billion without hurting “mum and dad investors”, according to our new modelling, by focusing tax deductions on investors with smaller property portfolios and removing them for richer investors.

Combined with changes to capital gains tax, reforming negative gearing could make the Australian housing market more sustainable and equitable.

Negative gearing allows investors to claim a tax deduction if their rental income is less than their expenses. It cost the federal government A$3.04 billion in 2013-14, according to our calculations.

Our report also confirms that negative gearing and the capital gains tax discount incentivise housing investors to take on debt. This potentially makes the housing market less stable and crowds out first home buyers.

Read more: FactCheck: are average earners the main beneficiaries of negative gearing?

According to Treasury modelling, the Labor Party’s plan to limit negative gearing deductions on newly acquired rental housing would put relatively modest downward pressure on house prices. Preliminary research from Melbourne University has found that eliminating negative gearing would result in an increase in home ownership.

Nevertheless, there are concerns that reforming negative gearing would harm the financial wellbeing of mum and dad investors.

But using data on the distribution of property and incomes makes it possible to differentiate between poorer and wealthier investors, allowing the government to target reforms to cushion the blow for investors on lower incomes.

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