What is negative gearing? How Labor policy change could spectacularly backfire on mum and dad investors - and renters could be worse off too
A possible plan by Labor to scrap negative gearing tax breaks for investor landlords could also end up hurting the people they are meant to help - renters.
A possible plan by Labor to scrap negative gearing tax breaks for investor landlords could also end up hurting the people they are meant to help - renters.
Anthony Albanese in Opposition dumped his Labor predecessor Bill Shortens policies in 2019 after the party lost its second election in a row.
But Nine newspapers is now reporting that Labor wants to revisit existing negative gearing and capital gains tax discount policies and has commissioned Treasury to do some modelling on possible changes.
Treasurer Jim Chalmers on Wednesday confirmed his department was examining possible policy changes.
Treasury looks at all kinds of policy options all of the time, he told reporters.
Its not unusual for the public service, and in my case my department, to examine issues that are being speculated about in the public or in the Parliament, thats how a good public service operates.
What is negative gearing?
Under existing negative gearing policies, investors can claim rental losses on their annual tax return.
Anthony Albanese in Opposition dumped his Labor predecessor Bill Shortens policies in 2019 after the party lost its second election in a row
That means a landlord can also claim mortgage interest payments, cleaning costs, repairs, body corporate fees, council rates, lawn mowing, landlords insurance, property management fees and water bills against their taxable income.
If the rental income is less than the cost of maintaining and paying off a property, a landlord is negatively geared and can claim that loss on their tax return for that financial year.
The difference between the rental income and the cost of providing a rental property is deducted as an expense from an individuals income for that year.
Labor is looking to revisit this policy because negative gearing has led to speculators buying up multiple investment properties which they can later sell for a big capital gain.
Along the way, these investors can negatively gear any number of properties.
Traditionally, more affordable housing markets like Brisbane, Perth and Adelaide have this year seen a double-digit surge in property values, despite the Reserve Banks 13 interest rate rises in 2022 and 2023.
This occurred as investors, able to borrow against other investment properties, were able to obtain finance from the bank and buy another home to lease out during a rental vacancy crisis.
University of Technology Sydney property economics expert Dr Mustapha Bangura and property professor Chyi Lin Lee last year released a report arguing investors have historically bought property, despite weak rental yields, because of negative gearing.
But scrapping negative gearing could also potentially hurt mum and dad investors, who would be forced to sell because they cant claim their losses on tax.
Labors possible plan to scrap negative gearing tax breaks for investor landlords could also end up hurting the people they are meant to help - renters (pictured is a rent queue in Bondi)
Younger property buyers, locked out of Sydneys house market, would also lose the ability to buy a first home they could rent out as they continued renting closer to where they worked.
That would mean fewer available rental properties on the private market, leading to even higher rents as a result of diminished supply.
It comes as Australia battles a rental crisis, with SQM Research showing Australias capital cities have an ultra-tight rental vacancy rate of 1.3 per cent.
Bob Hawkes Labor government in 1985 scrapped negative gearing tax breaks for investors, only to reinstate the tax break in 1987 out of concern the absence of negative gearing would lead to big rent increases.
Rents during that two-year period had only increased in Sydney and Perth.
The Greens, who Labor may rely on in 2025 to form a minority government if the opinion polls are right, commissioned the Parliamentary Budget Office to assess the cost of negative gearing on the Budget.
It found the tax breaks for landlords would cost $6.9billion in tax revenue foregone in 2024-25, rising to $13.5billion in 2033-34.
Under existing negative gearing policies, investors can claim rental losses on their annual tax return (pictured, a sold sign outside a home in Canberra)
Capital gains tax discount
The 50 per cent capital gains tax discount for residential properties was forecast to cost $5.4billion in 2024-25 rising to $7.94billion in 2033-34.
Labor went into the 2019 election vowing to halve the capital gains tax discount to 25 per cent for future purchases of investment properties, but Treasury is now also reportedly exploring restricting that policy.
The family home or someones principal place of residence has been exempt from the capital gains tax since it debuted in 1985 but John Howards Coalition government in 1999 introduced a 50 per cent capital gains tax discount.
That means that if a house goes up in value by $100,000 from the time an investor bought it, only $50,000 has to be listed on their tax return as income for that financial year, if it had been owned for at least 12 months.
This policy also coincided net overseas immigration tripling during the 2000s.
In the 1980s, when Australia had negative gearing and a capital gains tax, a Sydney house cost four times an average, full-time salary.
But by the end of the 2000s, that debt-to-income ratio doubled to eight and is now approaching 15, with Sydneys median house price approaching $1.5million.
An individual with a 20 per cent mortgage deposit cant borrow more than 5.2 times their salary.
This means someone earning an average, full-time salary of $100,017 is restricted to a $650,109 home - which wouldnt buy a median-priced house in any capital city market except Darwin.
The 50 per cent capital gains tax discount for residential properties was forecast to cost $5.4billion in 2024-25 rising to $7.94billion in 2033-34 (pictured, a home for sale in Sydney)
Tax politics
Labor under Bill Hayden lost the 1980 election when Malcolm Frasers Coalition government ran a scare campaign claiming he would introduce a capital gains tax.
But Hawke was re-elected in 1984 with a vow to hold a tax summit, leading to a capital gains tax in 1985.
The Coalition lost the unloseable 1993 election when Liberal leader John Hewson proposed a 15 per cent Goods and Services Tax.
John Howard as Opposition Leader ruled out a GST ahead of the 1996 election - using the phrase never ever - but he was narrowly re-elected in 1998 on a platform of a 10 per cent GST.
So, Labors exploration of changes to negative gearing and the capital gains tax - despite losing two elections with those policies - simply shows that political parties dont necessarily give up when voters say no.
