The Big Issue : Edition 512
THEBIGISSUE20MAY–2JUN2016 19 with many claiming on multiple properties. Negative gearing works best for the investor the more they lose, because then the investor is deducting more from their taxable income. And it is a lot of money. In 2013–14 landlords declared $11 billion of losses – which becomes $11 billion of untaxed income. The tax lost amounts to more than $4 billion a year. That’s a lot of schools and hospitals. The cost of the discount on the capital gains tax (CGT) is even bigger. But first, here’s how it works. From its introduction in 1985 until 1999, people paid tax on capital gains – the profit made when selling an asset – at the same rate they paid tax. In 1999 a discount was applied: the tax was halved. So if you were in a 30 per cent tax bracket, you paid only 15 per cent on your profit. If you were in the 45 per cent tax bracket, your discount was even bigger: 22.5 per cent. Australian Tax Office (ATO) figures show that the CGT discount costs the taxpayer $6.2 billion a year. It’s projected to hit $8 billion next year. That’s even more schools and hospitals. In fact, it’s more than the entire federal allocation for higher education. Or child care. The cost to the taxpayer of negative gearing and the CGT discount is $11 billion a year and growing, according to the ATO. For context, the projected budget deficit is $40 billion this year. MY MOTHER ALWAYS used to tell me to buy a house, “because one day you won’t be able to, they’re getting so expensive”. The logic seemed flawed to me – everyone needs a house, so who would buy them if they were too expensive? At that time neither of us understood negative gearing or preferential tax treatment of capital gains, but Mum was right. Houses have become unaffordable. Not because of the laws of supply and demand, but largely because of our tax laws. Tax laws loom as perhaps the defining issue of the coming federal election, but it’s too easy to get lost in a sea of acronyms and projections and switch off entirely. It’s important to have a good look at exactly how they work, who they benefit and what they cost. Negative gearing does not, at first, make a lot of sense. It’s all based on making a loss. Negative gearing allows a person to deduct their losses on an investment – a house – from their taxable income. So if you lose say $30,000 a year on your investment, which means the loan repayments exceed the rental income, that $30,000 is deducted from your taxable income. So you pay less tax. If you are in the top tax bracket, paying 45 per cent, the deduction comes to around $13,500. That’s about the same as a single unemployed person gets from the government over 12 months. And there are twice as many negative gearers – 1.4 million – as there are unemployed, The CGT discount was the double whammy for the housing market. Overnight, housing became an investment on which you could claim tax deductions on your losses, then pay half tax on your profit. Money that would have been invested elsewhere flooded into housing. The effect was predictable: prices went up. Which meant tax deductions and profits when selling the house went up. Which attracted more investors, pushing prices up further. Between 1960 and 1999 the median house price stayed within a narrow band of being between three to four-and-a - half times the median wage. By 2003 the price suddenly jumped to seven times the median wage. By 2011 eight times. In Sydney there are now many suburbs where houses are 20 and 30 times the median wage. It is often said that “mum and dad investors” use negative gearing most. Almost no cleaners claim negative gearing. About one in 10 teachers do so. Almost one in three surgeons do so. And because high earners can borrow more – and thus deduct more, at a higher tax rate – they profit more, with a bigger discount when they sell. The top 10 per cent of earners take nearly half of all negative gearing tax deductions and two-thirds of capital gains, as the Grattan Institute makes clear in its authoritative report, Hot Property. THE ISSUE OF TAX IS FRONT AND CENTRE IN THIS YEAR’S ELECTION, BUT WHAT DOES IT ALL ACTUALLY MEAN? MICHAEL EPIS DELVES BEHIND THE NUMBERS.