Negative Gearing Equity?

The Government are being hammered for not removing negative gearing as it is not “equitable”. Those saying “equity” seem to have a different definition then the standard tax axioms but when asked what they mean they indicate that the benefit of negative gearing (aka borrowing to buy an income producing asset and claiming a deduction for the borrowing costs) goes to high wealth individuals.

Of course it does… We have a marginal tax system where high wealth individuals pay more tax on each dollar they earn and so get better benefit for their tax deductions. If I earn less than $18,200, negatively gear and pay $1 of interest I get no benefit from the $1 in my tax return as there was already no tax to pay before I even considered my deduction. But if I earn more than $180,000, I get $0.49 of benefit (less tax payable) for the $1 of interest.

So the solutions available if you don’t like this “inequity” include a flat tax rate (not possible, unless you are Ted Cruze or Donald Trump) or limit deductions for everyone. Not just negative gearing deduction, but all deductions as the same inequity applies to all deduction (just as ridiculous).

The reason every tax deduction is not “equitable” is the same reason tax payments are not “equitable”. Because some people pay a much higher rate of tax on each dollar they earn (someone earning $180,000 pays an average tax rate of 32%, someone on $80,000 pays an average tax rate of 22% and someone earring $18,200 pays an average tax rate of 0%) they get a much higher benefit from deductions.

And for the Labor supporters who think their policy is more “equitable”… Under the Labor policy negative gearing deductions on existing properties will still be able to be offset against non salary income. Who has non salary income (dividends, business income…)? High wealth individuals. This will mean even more of the benefit of negative gearing will flow to high wealth individuals. And who will buy the new residential premises that can be negatively geared? Those that can pay the most (high wealth individuals) and those who will get the most benefit from the negative gearing (high wealth individuals). If you believe the current system is a problem, then the Labor proposal will only make it worse.

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About Ken Mansell

As a stay at home Dad most of the week this is my way of pretending I am still the tax counsel of ASX and SEC listed companies, working at big 4 firms, working at the Federal Treasury, on the Henry Review and at Parliament House for the previous government.
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One Response to Negative Gearing Equity?

  1. Removing negative gearing is a political nightmare. The simple solution is just to cap the amount you can claim or the loan size, don’t index the amount and let inflation eat away at the benefit. In 10 or so years, no one will care any more and you can remove it altogether.

    This is what they did in the UK with MIRAS. Absurd that it is still allowed to be deducted

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