Negative gearing the choice of the nation

The Australian Tax Office (ATO) recently released taxation statistics for the 2009/10 financial year.  The data had a lot of good information, some of which was touched on in last week’s blog however, this week we will be specifically looking at rental income and deductions associated with property investment.

Over the 2009/10 financial year there were 1,751,679 individuals that received rental income (owned investment property).  The number had increased by 3.5% from the previous financial year.  Of these 1,751,679 individuals, 1,110,922 individuals or 63% made a loss on their rental income; the remaining 37% of individuals turned a profit on their rental properties.

Of those 63% of investors that had made a loss on their rental income, the typical loss was $9,132 over the year or $176/week.  The most concerning sign is that individuals that earn less than $6,000 a year are carrying a loss of $207/week with only those on an annual salary of more than $180,000 carrying a greater loss each week ($399).  It is difficult to determine what this actually means however, you could assume that a portion of those on incomes of less than $6,000 p.a. are self funded retirees.  Of course a portion of these people are likely to not be self funded retirees either.  If the current housing market conditions persist and these people are essentially making no annual income having a negatively geared property is of limited benefit and they may in fact be looking to sell these homes in an already soft market.  Even for those that are self funded retirees, if they have no personal income there is no benefit to them having a negatively geared property asset.

Somewhat worrying is the fact that 825,284 investors making a loss on their rental income are earning $80,000 a year or less.  These owners are typically making a loss of $8,111/year ($156/week).  For most of those in the lower income brackets the need to negatively gear a property to offset their tax is typically lower than those on a higher income.  This leads me to believe that many have got into investment housing initially for the taxation benefits but obviously with a view to experiencing capital gains and the subsequent positive cash flow benefits in the future.  The statistics also show that 285,638 persons (26%) making a loss on their rental property are earning more than $80,000 a year.  These individuals recording a tax loss on their rental property are typically losing $12,082 a year or $232/week.

The news is much more positive for those investors that are achieving a profit from their rental property.  The typical owner with a net rental income of more than or equal to $0 is making $160/week from their property as opposed to the -$176/week loss many others are making.

The results highlight that most property investors are negatively geared.  Of course some will be quite happy to be negatively geared with the cost offsetting tax elsewhere while others, particularly those nearing retirement or at retirement, will be hoping the property starts to turn a profit in the near future.  Given the current economic and housing market conditions, it seems as if these investors will be reliant on a pick-up in rental growth to propel them to positive gearing rather than capital gains.  This is the reason why investors that are interested in purchasing in the current market must be careful and should focus on buying for long term capital gains while maximizing their rental return or even positive gearing rather than short-term capital gains.

About Cameron Kusher

Cameron Kusher is Head of Research at CoreLogic, specialising in primary and secondary data analysis, property market commentary and consultancy. Cameron has a thorough understanding of the fundamentals such as demographics, trends, economics and spacial analysis and is a regular keynote speaker for property-related groups, regulated industry bodies, corporations and the government sectors. Follow Cameron on Twitter @cmkusher

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3 Responses to Negative gearing the choice of the nation

  1. Ash May 15, 2012 at 4:42 pm #

    “…those nearing retirement or at retirement, will be hoping the property starts to turn a profit in the near future.”

    Having just read the ATO’s report, it’s a shame they have not included the individual’s age in the table against their net rental return and taxable income. How many negatively geared property investors are 2-5 years from retirement age? Interesting question to ponder I think.

    The cornerstone of negative gearing is to have another income (such as salary, wages or business income) upon which to deduct rental expenses from. Negative gearing, without another taxable income, may be harder to sustain from a cash flow perspective. It would just be interesting to see how many ‘negative gearers’ are close to retirement age.

    ATO full report here
    http://www.ato.gov.au/content/downloads/cor00305922_2010TAXSTATS.pdf

    Ash

  2. Chris Stavenhagen May 17, 2012 at 9:26 am #

    It has been my view for some time that the semi religious mantra of ‘negative gearing’ has over enthusiastic proponents who are out of touch with market conditions. Now that overall tax rates have flattened out and market conditions for capital gain have softened a different approach to residential property investment is required.

    It is also my view that investment strategies should make the investor money not cost money. Early losses are acceptable but only for a relatively short time. The ultimate goal should always be a positive return for the investor. This has given residential property investment a poor reputation because old style advisors have over emphasised reductions in tax payable as the principal advantage of such investments.

    The moden aim should be to have properties neutrally geared and heading to positive gearing then to total ownership by retirement age, whatever that is. When building up a property portfolio at a younger age the point at which the first property has a surplus is then the time to purchase the second or subsequent property.

    The stories of people building up huge property portfolios based on negative gearing depended on a particular set of market conditions and tax rates that prevailed in the past that in turn resulted in rapid property price increases. The concept was sold on the notion that capital gains would more than make up for losses on operations (the rent not servicing the loan). Those days have long gone.

    In addition if the socialist agenda currently abroad in this country has its way then negative gearing may either be outlawed or severey restricted. This would then markedly affect property prices as negatively geared investors left the property market enmasse. There is precedent for this in the past and it led to a shortage of private rental properties and of course the public sector could not satisfy the resulting demand. I realise that this is a side issue however it is relevant to the matter under consideration here.

    From an investment strategy point of view it should be the medium/long term goal to have property investment make money for the investor. A balance should be struck between using negative gearing to build a property portfolio and having the total investment pay a dividend to the investor. This is particularly so at or near retirement age when the investor should be able to live partially or totally off the rental income stream. If this doesn’t happen then the strategy has failed.

    Chris Stavenhagen

  3. Business Process Outsourcing June 10, 2012 at 12:53 am #

    Thanks for sharing the information, it was quite useful. My brother in australia just bought a property and i am now worried about him, as he bought the same as a long term investment.
    The numbers will be eye openers to him.

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