Not The Negative Gearing Debate Again? Please!

By Development Finance Partners

Recent press has reported that both sides of politics are looking at Negative Gearing policy (on property) as a possible means of pulling back the budget deficit and addressing housing supply and affordability.

In order to predict what may happen in the future, it makes sense to look at the lessons history has already given us.

Back in the mid 1980s negative gearing on property investment was removed briefly by Paul Keating however, the policy decision was withdrawn shortly after. Not only did the policy create severe backlash from the property sector and the electorate at large, there is evidence that the policy placed pressure on rental prices and vacancy rates.

The left side of politics are talking about removing negative gearing on established housing however retaining it for new dwellings. Not only does this potentially create two sectors within the property market, it is fundamentally flawed as a means of constructive policy.

The right side of politics have stated that the negative gearing debate is “on the table” within their on-going tax policy review. What are they thinking?Australian Taxation law states words to the effect that any expense necessarily incurred in gaining or producing assessable income is an allowable deduction. Therefore any interest incurred on a loan which is used specifically to purchase an investment class which provides income (being rent or dividends), is an allowable deduction. This applies to all investment asset classes whether it is shares, bonds or property.

Negative gearing is a term that can apply to any asset class. In effect the rental/dividend income is lower than the interest cost on the loan used to buy the investment. That difference is allowed to be deducted from the other income of the tax paying entity.

On the other hand, if the rental/dividend income is greater than the interest cost on the loan used to buy the investment it is Positive gearing. That surplus will be added to the other income of the tax paying entity.

So if Government policy is to remove negative gearing on property then they should do it on all asset classes. And they never will.

To single out the property market (or part thereof) and make pseudo adjustments to the mechanics of the tax system is a flawed strategy. It removes confidence in the investor market at large and will ultimately lead to a rise in rents and a further shortage in stock.

In fact, The Henry Tax Review recommended that the government should implement a “range of non-tax policies which would have a more significant impact on housing supply and affordability”.

Such as:
-Planning
-Zoning regulations
-Approvals process
-The allocation of infrastructureThe property markets are already slugged harder than other asset classes by way of land tax.

If Governments want to balance their budgets they should look to measures that build investor confidence, enhance wealth creation which in turn leads to an increase in headline tax.

What can Property Developers Do To Influence The Debate and Protect Themselves?• Join organisations such as The Property Council and the Urban Development Institute of Australia who lobby the Government against change
• Diversify their developments to appeal not just to investors but also to owner occupiers
• Stay informed on the debate and do your own homework and research around possible impacts.

Development Finance Partners are experts in property development finance and can provide a range of finance options for your development including joint venture funding, preferential equity and mezzanine finance. For more information visit www.dfpartners.com.au